If you or your clients are waiting for the current bout of market volatility to subside and are expecting a return of the roaring market of the past decade, you may be waiting a long time.
Though more than a decade of recent experience may have changed our ideas about what a normal market environment looks like, and the last 30 years have changed how we view inflation, it is reasonable and prudent to consider the possibility that the next era won’t look much like the post-Great Recession era that preceded it.
Recency bias is powerful. It would have us believe that a 2.2% average rate of inflation is typical. Historically, even in the post-World War II period, it is not. Neither are near-zero interest rates. For advisors who launched their careers within the last 14 years, I can imagine a 5% federal funds rate seems like the world turned upside down, though that figure is still historically low.
As an exercise, imagine that average annual inflation will settle closer to 3% than 2% (or higher), and that the federal funds rate may not reverse back into to near-zero figures within our careers. How does this change your long view? How does that change your clients’ asset allocations? How does it change your areas of focus?
We can’t know the future, but we owe it to our clients to have a plan and to keep planning forward.
Prior to 2000, strategies to fend off inflation were part of every advisor’s basic tool kit. You may find new opportunities in previously unexciting stocks, ones that are led by a steady management team and have a history of paying dividends. Optimizing cash balances, hardly a centerpiece topic in most client meetings, may become a top agenda item. For some clients, time gating associated with many alternative investment strategies may be more of a concern.
When you make an assessment of your expectations and biases, you’ll see how they can shape the advice you’re giving. By challenging your own ideas, you'll sharpen your strategies. This is true outside of your clients’ portfolios, as well.
In an up market, everyone is happy for generally the same reason. In a challenging market, everyone is upset for reasons all their own. This makes communication with your clients even more important, and more complicated. Pay attention to what your clients are telling you and resist the urge to make assumptions. Even the most low-key clients may get anxious when faced with uncertainty. I’ve never heard an advisor say they overcommunicated during a down market.
Keeping your client invested can be the best move in a volatile or down market. Meanwhile, a declining bottom line will make anyone nervous. If your client has an idea that you think has been motivated by fear, it may still be worthwhile to explore it.
This is an opportunity to enhance your collaborative partnership. Discuss the risks and especially highlight whether their idea is riskier than the rest of their financial plan, and how it could impact their strategy. You may be able to make it work. Sometimes it’s OK to scratch the itch as long as you don’t alter the financial foundations, and it keeps your clients from trying to claw back short-term losses. Meanwhile, resist the urge to overtrade a portfolio during bouts of volatility.
As useful as the lessons of the past can be, the market — like time — is a river, and no two moments are the same. Your clients may try to make sense of the current climate in familiar terms. Help them understand that experience is instructive, not prescriptive, and take extra care to help them understand your reasoning when making moves counter to their memories of markets past.
Don’t lose sight of all the other things that need attention. Inflation is particularly burdensome on retirees, so it’s good to remain mindful of longevity-related issues, an area of focus for my practice and my firm, Raymond James. Another item easily lost in the headlines is the end of the expanded gift tax exemption at the close of 2025. Clients need to reach out to their trusted legal and accounting advisors now, not at the eleventh hour.
Your clients’ lives continue as the world keeps turning. You owe it to them, and your practice, to make sure you’re turning with it.
Nancy Leizman, a private wealth advisor at Leizman Wealth Management of Raymond James, launched her Cleveland, Ohio, financial advising practice in 1987, six months before Black Monday.
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