I have lived through many bear market and bull market periods during my working life. Each period was different yet featured some common themes in terms of market and client behaviours. Despite the early February decline, we remain in the midst of an extended secular bull market, which has triggered some unusual investor behaviour that challenges ongoing management of clients and their portfolios.
During the technology bubble at the turn of the century, clients often demanded exposure to large-cap growth stocks – namely, tech and biotech stocks. Investors also were relatively sour on Canadian stocks because their 10% annualized returns were half of those for U.S. and global stocks. Many clients fired their financial advisors for not complying with requests to add more of the market segments giving the highest returns.
My clients’ actions during the two years prior to the global financial crisis of 2008-09, while less extreme, were similar for me. I met with many elderly investors who were 80%-100% invested in equities. Not surprising, many clients questioned the inclusion of bonds because of their flat returns vs stocks’ impressive gains. Reflecting on my client interactions, there are lessons in how to handle clients’ current demands and behavioural tendencies.
Stick to a purpose-driven process, I say. During those two periods I focused on a disciplined process driven by fundamentals: understand the purpose of the money; translate that purpose into measurable targets; determine the client’s risk profile; design a portfolio that aligns with both return target and risk profile; and document my advice in an investment policy statement (IPS).
All advisors should follow the same basic process. When clients see you use your process time after time – in all kinds of market conditions – they will be more likely to follow the advice that arises from that process.
Give your clients your blessing to scratch their investment itch. Cryptocurrencies, technology-driven disruptors and marijuana stocks are hitting dizzying highs, much like the dot-coms did in the late 1990s. I took a pretty hard line with clients with regard to following my advice in the past. But, for some, I should have provided guidelines for them to dabble in then-trendy investments within the context of their broader portfolios.
I wasn’t wrong, per se, in advising many clients in 2000 to exit tech-focused funds in favour of more diversified portfolios. But some clients who resisted did not take any of my advice and stuck their with tech stock-heavy portfolios.
In hindsight, those clients might have responded better to me showing that I understood both the bull and bear scenarios for their speculative investment of choice. And building in a small segment for speculative positions into these clients’ IPSes – or suggesting informal guidelines for such investments – might have been effective.
Attempting this strategy today requires getting a client’s agreement that investing in cryptocurrencies or marijuana stocks is speculation. Then, a guideline could see a client invest up to 5% of his or her portfolio, up to a maximum of $50,000, in order to scratch their investment itch, but do so without altering the ability to achieve long-term goals.
Dan Hallett, CFA, CFP, is vice president of Oakville, Ont.-based HighView Financial Group, which designs portfolio solutions for affluent families and institutions.