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If you want your clients to focus on their long-term objectives, you have to help them look beyond recent market events, which can taint their investment decisions.

Clients tend to have a “recency bias ” — that is, their views and expectations of future market performance are influenced by recent events. This bias can cause them to want to bail out of their investments.

For example, stock markets might temporarily plunge because of weakness in a particular sector, causing clients to second-guess their portfolios and investment plans.

“Recency triggers [fears that] what just happened is going to happen again,” says Elizabeth Hoyle, chief marketing officer with Bridgehouse Asset Managers in Toronto. “It’s a natural tendency to which we have difficulty adjusting. It plays with our perception and is not based on reality.

“In reality,” Hoyle continues, “such events do not happen as often as we think.”

When clients display a recency bias, says Jamie Brubacher, institutional client consultant with the Cidel Group in Toronto, you have an opportunity to review their portfolios and determine whether their investments are performing according to plan. Such discussions can give clients comfort that their concerns about recent events are unwarranted.

Here are two approaches you can take to dispel the recency bias among your clients:

> Provide historical perspective
Demonstrate to your clients that, historically, markets have rebounded after periods of volatility brought on by short-term events many times and gone on to perform well over the long term. You might also show them that the S&P 500 has lost in excess of 10% due to various events on only 10 occasions over the past 88 years, Hoyle says.

Brubacher suggests aligning the long-term average market performance with clients’ own portfolio performance.

> Revisit clients’ goals
Ensure that your clients understand why their portfolio is structured the way it is and the role of the various investments within the portfolio, Brubacher says. “Make sure you are on the same wavelength about their expectations,” he says.

Remind clients what their long-term goals are and demonstrate that you’re on target, he says. Using an “outcome-oriented approach” enables clients to see that you are meeting their objectives.

For example, Brubacher says, you should be able to show your clients that the performance of their portfolios has remained relatively stable in times of good as well as bad markets. This exercise will demonstrate that the impact of recent events might not be as bad as they think.

Hoyle suggests that you remind clients that investing is like a marathon. “They should look at their investment plan as a continuum.”

Show them that, depending on their time horizon, they may have several years, or decades, over which to recoup any losses.

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