Some clients experience increased anxiety when markets head south, fearing the value of their investments will head in the same direction. Usually these clients’ first reaction is to want to abandon the markets and head for the safety of cash and cash equivalents, such as government bonds and guaranteed investment certificates.

Your role is to calm the nerves of clients and convince them that abandoning their long-term investments and sitting on the sidelines until the markets recover is a risky proposition that can cause them to fall short of their investment goals.

“The risk of being out of the market is greater than that of remaining invested during down markets,” says Ahad Ali, portfolio analyst with Octane Capital in Toronto.

There are several steps you can take to calm clients’ anxieties:

> Separate facts from fear and emotion
Remind clients that “what goes down will eventually come back up,” Ali says.

Explain that volatility and market downturns are temporary phenomena. Try to get clients to look at facts of how market behavior has affected the performance of their investments.

“Often, clients react emotionally to headlines that indicate a decline in a particular segment of the market,” Ali says, “even though they might not be exposed to that segment.”

Make them aware that all segments of the market do not necessarily behave the same way at the same time.

> Demonstrate market behaviour
Use appropriate charts and illustrations to demonstrate market behaviour to give clients comfort that even though their portfolios might have declined in value, such decline is only temporary. Illustrate the behaviour of various sectors of the market — for example, resources vs financial services.

“Provide reasons for any declines,” Ali says, “and use third-party sources, if available, to validate your reasons.”

> Remind clients of their long-term objectives
Explain to your clients that you have structured their investments to meet their long-term objectives, which may be many years away. Therefore, they should not worry about temporary market fluctuations.

“Explain why you constructed a diversified portfolio,” Ali says. “Gains in some sectors are offset by losses in others.” These offsets minimize potential losses.

Although you should have had this discussion with clients previously, it is worthwhile to remind them. “The risk of losing money can trigger fear and anxiety.”

> Tell them that they pay you to worry
Give clients comfort by reminding them that your role as their advisor is to “worry about how well their investments are doing,” Ali says. Therefore, they should leave the worrying to you.

Repeat to clients that you have a disciplined process for managing their assets that helps you sleep at night — and that they should not be losing sleep.

> Reassure clients
Remind your clients that you are staying on top of market developments and will make changes to their asset mix if the situation warrants in order to minimize any losses. Assure them that you will be in contact should that become necessary.

Says Ali: “Demonstrate confidence in your investment process to make clients comfortable.”

This is the second part in a two-part series on talking to clients during periods of market volatility.

Click here for part one.