Risk Tolerances Have Receded, Stop Fighting The Tide

“Stay the course” is empty advice when your clients have permanently given up on greed. We’re talking about solutions next week.

A generation of outreach and education has left a lot of retail investors with a kind of sentimental stagflation, the worst attitude possible.

On one hand, they’re complacent. They know stocks are a random walk that points reliably up only in the long term. Passive funds provide exposure to that trajectory. 

But they aren’t happy with it. Even when they’re 100% in index funds, the market weather makes them nervous. They call in. They second guess every move.

Maybe your clients are different. That’s great. But quite a few advisors still have to babysit their people whenever the tide turns.

In the past we’d simply repeat the old messaging. Stay the course. Patience. This too shall pass.

Now I’m not so sure. Historically, about 30% of all investors are bearish at any given moment. They’re never comfortable with rosy scenarios.

Show them the best market in history and they’ll only see doomsday lurking just across the horizon. You’re not going to change their mind. You haven’t yet.

And since these are the investors who are least likely to be happy with platitudes and a passive stock-heavy allocation, negativity is the friend of every advisor who wants to carve assets away from a competitor.

Yes, I have come back around to the wisdom of guaranteed retirement income as a way to liberate some investors – the negative ones who will always focus on the downside – from volatility.

We’re talking about it next Tuesday with Jack Martin in the next Wealth Advisor webinar. You can reserve your place NOW.

A fundamental mismatch

One of the best things to come out of the “behavioral economics” fad was the realization that investor psychology really matters.

And very few investors are rational. They fall into destructive habitual patterns with surprising regularity, chasing returns and panicking at the worst possible moment.

Part of the advisor’s job is to keep coaching them past these bad habits. We beg, wheedle and plead in order to maintain discipline. 

But that discipline can point to a goal that any given client may not fully embrace. He or she can repeat all the messaging and still not believe it.

And when investors don’t really trust all the long-term realities of the market, all you can do is hope they’ll come around some day. In the meantime, they’ll resist.

That resistance is not always worth fighting. Sometimes it’s better to simply give the client the best experience he or she will accept, even if it’s not the best experience you know you can provide.

Furthermore, people change. A decade ago, your clients were younger and had more time to recover from a crippling setback. They also didn’t have the psychic trauma of the 2008 crash to deal with.

Investors who were perfectly suited for an all-in wealth accumulation approach in 2007 are now dragging their feet. Every year gets harder. 

Even a good year feels somehow inauthentic. They literally do not trust the numbers they see.

No amount of coaching is going to change that in the short term. Odds are good that if you see any shift in their behavior, it’s going to be right before the real downturn.

But now you know who they are. You can track the people who call when the market lurches and forward you the gloomy links when everyone else is feeling good.

These are the clients who just aren’t happy with stocks or even with a 60-40 “conservative” allocation.

Annuities will lock them out of the market’s natural upside. But these clients would rather sleep soundly with less than stay on the rollercoaster.

And realistically, I’m not convinced 60-40 will prevent any nightmares in the next few years. Bonds are dead money right now at best. Even my mother says so.

If bonds no longer provide near-term safety, clients who crave safety are going to be even more difficult to work with than usual as their hard-won sense of market reality crumples. 

What you want to provide these people is not performance but safety. That’s not really yield stocks in this environment. They’re paying you for risk prevention . . . for the closest thing to a guarantee you can offer.

We’ll go into the intricacies of this on the call next week. From my point of view, it isn’t about the numbers. It’s about the psychology.

Of course the numbers carry their own weight. Modern annuities are no longer as expensive as they were and provide better risk-adjusted returns than they did.

And inflation is no longer the long-term threat it once was, while fixed-income products simply don’t compete for anyone’s serious attention.

But remember, these particular clients aren’t really chasing upside. As far as they’re concerned, it’s not about making money. It’s about paying to protect what they have.

Some advisors do really well with this type of client. I think a lot of us are so locked into the long-term accumulation mindset that we miss the real conversation. 

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