How I keep clients invested during a crisis

One of the most familiar adages in the investment world comes from Warren Buffett: buy when there is fear and sell when there is greed.

This advice is simple, yet few people follow it.

When the Covid-19 pandemic began to affect markets, one client phoned me to say, “I’m really afraid this is going to screw up my retirement plans. Maybe I should cut my losses now. I don’t have much time to make back what I’ve lost.”

A more sanguine client call went like this: “I’m not worried about myself; I don’t need the money. But I wanted to leave it to my kids.”

Most investors cannot resist buying when stocks are high and selling when they are low. Each time that happens, money is left on the table. I have seen eight bear markets in my career as an investment advisor and portfolio manager, and can attest to the fact that emotions get the best of many investors when the markets start to tumble.

The worst crisis prior to Covid-19 was the 2008-2009 financial crisis, when stock markets fell for 18 months. I remember clients telling me, “I can’t take this anymore. I have to get out of the market while I still can.” One friend confided she had sold everything and would never invest in equities again. My job was to keep repeating to clients: “Stay invested. Concentrate on the long term. The markets will go back up.”

They did. It took four years, but then we entered the longest bull market in history.

As I have explained in past columns, following the 2008-2009 crisis, I changed my portfolio management style to focus on using ETFs — which required a commitment to ongoing investor education.

As the recent bull market stretched to historic proportions, I reminded clients frequently that trying to time the market was an exercise in futility. I became more defensive in my portfolios and focused on cash management, so that client requests for cash during a down market would not require selling equity.

But even with regular client communication, educational seminars and webinars, it’s difficult to prepare people for the sort of volatility we saw in March, when markets plunged by double digits in a day.

Emotions during this bear market have been particularly raw since the catalyst was an unforeseen health crisis that has affected every aspect of our lives.

One prospective client contacted me saying he had sold as soon as he read that the virus had spread to Europe. He was relieved to have made what seemed to be a good decision in February, but wished he had bought back at the bottom in March. He wanted guidance on how to move forward. At the time of our discussion in July, my portfolios were positive. Indeed, he had waited too long.

To help clients see beyond the immediate chaos of a crisis, I use stories of how clients and I have coped with past crises. I also use visual tools such as the Andex chart (a graph of stock and bond market performance dating back to 1950).

I explain to clients that remaining invested through a market downturn eliminates the risks of market timing, and ensures full capture of the upside rebound when markets turn around. The Andex chart clearly shows that every past correction and bear market was followed by a rebound that eventually led all markets to higher highs.

I also remind clients that their portfolios have core exposure to broad market indexes using ETFs such as XIC for the S&P/TSX composite; VUN for U.S. equity; ZDM for Europe, Asian and the Far East; and XLK for technology.

Being a discretionary portfolio manager means that I can rebalance portfolios during critical times like corrections and bear markets without requesting client approval. This allows me to act in a timely fashion during months like February and March, when I trimmed positions like technology and healthcare, added to the broader indexes and sold portions of my longer bond positions to add to equity.

During this period of tremendous volatility, I reached out to clients with a webinar series called “Conversations about money during a time of crisis and every day.” This initiative was extremely helpful in keeping clients focused on the importance of recognizing their emotional attachment to money and discussing the financial impact of the crisis with not only me, but also their family members.

The feedback we received from the webinar series was very positive. The client I mentioned at the onset of the article reached out to thank me for helping her come to grips with her fears and putting the situation into a longer-term perspective. She didn’t sell and was happy she didn’t.

My client felt who was worried that he might deplete his estate if he didn’t sell waited out the situation and finally confided that he was happy with the way I had handled things.

We can never know when and how much the markets will correct, but there is reassuring information from the past that every correction has a beginning and an end. Helping clients manage their emotions to stay the course during difficult times and remain invested in ETFs that will capture the full market upturn goes a long way to creating wealth over time.