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Many advisors are busy reminding clients that market downturns like the one we’re in today are normal. Still, it’s a tougher conversation with new, younger investors who haven’t experienced anything quite like it before.
Even those who got into investing around the start of the pandemic were largely unscathed by that market drop, given the relatively quick recovery, especially if they put money into hot sectors like technology.
Today, the steep and prolonged losses in tech and many other sectors have advisors reiterating the importance of diversification and investing with longer-term goals in mind, particularly among their millennial and Generation Z clients.
“We’re seeing a bit of uncertainty from the younger generation because many of them have never been through a cycle like this,” says Charles Provost, wealth advisor and portfolio manager with the Vo-Dignard Provost Family Wealth Management team at National Bank Financial Wealth Management in Montreal.
It was more challenging for advisors to educate new investors about risk tolerance and asset allocation when the markets were soaring, Mr. Provost says.
“Now, more people are turning to us for advice on how to handle volatility and manage their portfolios through tough times,” he says.
A global study from Natixis Investment Managers found that 40 per cent of millennials are working with a financial advisor, while only 7 per cent rely on automated advice through robo-advisors and 19 per cent use a combination of the two. The study, done in the second quarter of 2021, also says 40 per cent of survey participants want their advisor to help them navigate volatility.
The report also notes millennials may be falling victim to recency bias, expecting long-term returns of 16 per cent above inflation. The optimism is likely driven by double-digit returns on the S&P 500 of 29 per cent in 2019, 16 per cent in 2020 and 27 per cent in 2021, the report notes. It adds that those returns are well above the index’s 4.6 per cent average annual return over the 20 years between 2000 and 2020.
The S&P 500 is down almost 20 per cent so far this year as of June 24, which has been a reality check for investors.
When the markets drop, advisors can add value for clients by keeping them on track with their investment goals and preventing panic selling, Mr. Provost says.
“It’s a way to shift the focus toward their financial goals,” he says.
How comfortable are investors with risk level
Scheherazade Hasan, associate portfolio manager at Wealthsimple Inc. in Toronto, says many clients are calling in to ensure they have the right investment strategy amid the market volatility.
“Some are really just looking for reassurance that … they’re going to be okay,” she says, “especially from this newer group who have never experienced this before.”
Many investors also just want to hear about what’s happening in the markets, in simple terms, without jargon.
Ms. Hasan says she reminds clients about the importance of portfolio diversification and having a longer-term plan. She also tells investors that while it may be their first time experiencing a longer market drop, it likely won’t be the last.
“For younger investors, it’s important to remember that you’re going to experience a few more of these in your lifetime,” she says. “Experiencing your first downturns can be a good opportunity to reflect and say, ‘Was I potentially taking on more risk than I was comfortable with?’”
She also says investors should stick with their strategy, especially during times of uncertainty.
“For these younger investors with a long-term outlook, this downturn really does work to their benefit,” she says, adding that markets have recovered many times in the past.
Keep cash aside, look for opportunities
It’s also a good reminder for clients to keep the money they need in the short term, such as to buy a house or a car, out of the market.
“It’s really important to have that money set aside ... so that it’s protected during times like these,” Ms. Hasan says. “Having that cash set aside into something safe also gives you the confidence to invest through markets like these. Knowing that, if I need cash, I have access to my savings.”
Simon Tanner, principal financial advisor with Dynamic Planning Partners at iA Investia Financial Services Inc. in Vancouver, says he’s been using a “comfort presentation” with clients, highlighting how the markets have performed in the past.
He says the historical perspective can be particularly helpful for newer investors who haven’t been through a correction or bear market.
“Then, we get back to their goals and what they’re investing for,” he says.
A market downturn is also a good time to review a client’s risk tolerance, Mr. Tanner adds.
“It’s a good gut-check opportunity. Is this their legitimate comfort level? It’s easy to say you can stomach a 20-per-cent downturn when the markets are going up,” he points out.
Mr. Tanner also uses periods of market volatility to remind clients of the different investing styles, such as growth or value, momentum or quality – and how they might wish to react.
“It’s a good time to talk about potentially taking advantage of the downturn and finding quality names on sale,” he says.
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