How working with a financial planner can reassure your clients during periods of market instability

Volatility is an accepted and expected aspect of the stock market, but the shock of the pandemic transformed market volatility into instability.

Stock markets across the world have been unstable to say the least, with many experiencing an initial drop in March 2020. This drop was followed by a slow, rocky rise as the global Covid-19 situation unfolded.

This is demonstrated through the fluctuation in the FTSE 250 since January 2020, hitting a low of almost 15,000 before recovering to reach its pre-pandemic level in the spring of 2021.

Statistics above collected from Yahoo Finance and their FTSE 250 “historical prices” data table.

Given the recent instability, your clients may be worried about their personal finances. Perhaps the value of their pension has fallen, or they’ve been watching tumbling stock prices and are worried that it may affect their investments too?

This is where the expert advice of a financial planner could be vital. Your clients may not know where to begin if they fear the value of their investments has fallen, and so working with an adviser can give them more financial confidence and stability.

Planners can act as a sounding board

With stock market instability comes investor uncertainty. Emotions and worry could be running high, and clients may be more likely to make a rash, knee-jerk decision. This is where a financial planner can help provide reassurance.

A financial planner can help your client cope with “loss aversion”. Loss aversion is a behavioural tendency when investing to focus more on avoiding losses than making gains. This can often result in the early selling of well-performing stocks, the panic-selling of stocks that take a small loss, or a lack of well-advised risk taking.

Psychological research suggests that the pain of a loss is about twice as intense as the feeling of joy an investor may receive from a gain. The more that your client experiences a loss on the stock market, the more prone they are to loss aversion. This focus reduces their willingness to take risks and vastly reduces their potential returns.

Selling after a fall in the market is ill-advised. If a client’s home had fallen in value in the short term, would they immediately put it up for sale and accept a loss? It’s unlikely – and it’s the same with investments.

While it’s easy to let emotions take over in a highly stressful financial environment, reacting to a fall in the market can be a mistake. Multiple studies have found that this is one of the main reasons that investors lose money.

Working with a planner can help to keep your clients on track. We can counsel clients so they avoid making knee-jerk, emotional decisions that can damage their long-term security. We can remind them that, in this case, investments always rise and fall, and that patience is generally rewarded when it comes to long-term investing.

Planners can encourage clients to stay invested

Buying low and selling high is the obvious goal for any investor, but clearly it isn’t that simple. There are two key concepts when it comes to achieving this goal. These are “time in the market” and “timing the market.”

The difference here is key. Timing the market is about predicting the future, a difficult feat at the best of times. Stock markets have good and bad days, and the key is to aim to be invested on the good days and not on the bad days.

But stock market performance is driven by unpredictable factors, so it can be incredibly difficult to know when these good and bad days might happen. Your client could lose thousands of pounds by investing or selling at the wrong time.

So, what’s the alternative? It’s time in the market; sticking with it for the long term. A planner can encourage your client to, once invested, stay invested.

A recent study from Schroders shows how important it is to remain invested.

If a client had invested £1,000 in the FTSE 250 at the beginning of 1986, Schroders’ research suggests that leaving the investment alone for 35 years could have made it worth £43,595 by January 2021.

However, attempting to time the market could have significantly reduced your client’s returns. If your client had missed the FTSE 250 index’s 30 best days over this 35-year period, then that same investment may have only been worth £10,627. That is an overall difference of £32,968, just from missing 30 days over a 35-year period.

Of course, a client would have to be incredibly unlucky to have missed all 30 of the best market days, but nevertheless the research shows how costly timing the market could be.

We will consider your client’s goals, so they know exactly what to work towards. We can identify how much is “enough” for your client and focus your client’s mind on their desired outcomes.

Your clients may need our advice

We can prevent your clients from making emotionally driven and potentially damaging decisions and act as a sounding board to keep them focused on their goals when markets are volatile.

If you have clients that would benefit from advice, or you’re interested in how you can work more closely with us, please get in touch. Email enquiries@prosserknowles.co.uk or call 01562 829 222.