How should we react to a market fall
How should we react when there is an unexpected downturn in financial markets?
This question was probably being asked by many advisers and their clients as global equity markets fell in the first weeks of February.
At the time of writing, the fall in equity prices at the beginning of February appears to be a relatively small correction and far from a full-blown crash. The later is reserved for major events such as Black Monday in 1987, the Dotcom Crash in 2000 and of course the credit crunch in 2008. In this context a relatively small fall in equity prices of about 3% so far in February is nothing to worry about and is probably just one of the ups and downs of the stock market that everybody talks about.
However, with so much uncertainty in the world this small correction can be thought of as a dry run for a possible bigger correction in the future and a wake-up call for anybody who has invested in drawdown without the right investment strategy.
Don’t bury your head in the sand or panic
As with most important questions, there are no easy answers. On the one hand advisers will want to reassure their clients that all is well but on the other hand they have a responsibility to explain what has happened and if necessary review the investment strategy. Some people may just bury their heads in the sand others may panic and make rash decisions.
Do a proper job in the first place
The best way to avoid difficult conversations following a fall in fund values is to do the job properly in the first place. I have always said good advice stands the test of time no matter what happens to markets in the future so it is important to think about what effect a future stock market crash will have on client’s retirement plans and their personal stress levels. This often translates to an investment strategy that is not looking to shoot the lights out but to achieve steady returns with a soft landing if markets fall.
This is all common sense and may appear as trying to teach grandmother to suck eggs, but it is surprising how many older investors have inappropriate investment strategies. I am sure you will have a suitable investment strategy, especially if Better Retirement is your financial adviser, but what if you don’t have the benefit of such excellent advice?
So back to the question; how should we react to a stock market correction?
I need to look no further than a brilliant email newsletter from a well-known adviser entitled “Gentle words of reassurance”. which was sent soon after the recent falls in global markets. The first sentence reads; “It’s often said that our role as Financial Planners is to manage client behaviour, not to manage their money.”
This shows that a good response in times like this is to be quick off the mark and provides a level-headed assessment of the situation whilst avoiding any sense of panic.
This chimes with my own view that at all stages of the retirement journey there are two things happening; a lot of technical stuff that advisers understand and a lot of behavioural stuff that is really important to clients.
Everybody needs financial advice
This surely demonstrates why everybody should have a financial adviser because left to their devices, most people cannot properly manage both the technical and behavioural side of the equation. This means that when markets go south your financial security may go in the same direction if you don’t have a good financial adviser.