Managing Client Expectations in Volatile Markets

Managing Client Expectations In Volatile Markets

1. Keep Things In Perspective – Bull Or Bear,

No Market Has Lasted Forever

As the longest recorded bull market run in history

came to a close in early 2020 – albeit with several

constructive corrections – your clients may be asking

you how long until the next bull market. The question

is a reasonable one, but the answer is complicated.

After all, even advisors can’t be expected to know

ahead of time when the market will shift from bullish

to bearish, and vice-versa. What we do know is that

eventually markets run out of steam for a number

of reasons. When that happens, remember bear

markets also have an end.

Watching investment portfolio values climb was

fairly enjoyable in recent years. However, the market

correction seen during the rise of the coronavirus

pandemic is a reminder that black swan events come

seemingly out of nowhere. Also, when stocks go

parabolic without regard to company fundamentals,

we enter bubble territory, and that never ends well.

To prepare clients for volatile markets, a kind of “defensive

pessimism” is called for: imagining various possible

negative outcomes so that you and your client are

strategically and mentally prepared for all possibilities.

For many investors, an effective strategy is to simply

stick with the predetermined plan. Of course, clients

may be unsatisfied by telling them to do nothing

when panic is all around them. That’s why you need

to explain to them the reasoning ahead of time. Take

the time to remind clients that diversified investors

with a well-constructed financial plan and no changes

to their personal circumstances have little incentive to

tinker with their portfolios.

2. Keep Teaching But Start Coaching

Client education is an essential part of a successful

working relationship. Being able and willing to

explain in plain terms the actions you are taking with

a client’s portfolio could set you apart from jargon-

laden advisors.

However, education is just the beginning. If an

advisor wants to help clients respond calmly and

rationally to potentially worrying trends in the

market, they need to go a step further and actually

coach them. Education is about understanding,

whereas coaching is about behavioral modification.

Put another way, it’s the difference between knowing

and acting.

Being a good advisor has always been about more

than just selecting investments and managing a

portfolio. Psychology is becoming an increasingly

important part of helping clients help themselves. In

the words of Benjamin Graham, “The investor’s chief

problem – and even his worst enemy – is likely to be

himself.”

How can you apply coaching to your client

relationships? Take time to reflect with clients

on decisions made (either through discretionary

control or client-directed) that didn’t pan out and

discuss things that could have been done differently.

Encourage them to read regularly about the market

so they are more desensitized to stock market

turbulence and volatility. It takes time for these

practices to set in – but that’s why it’s so important to

get started now.

We believe the key to weathering any market

volatility is to immunize clients from all the

doom and gloom in the press and in the financial

community. Setting loss expectations now also

prepares clients emotionally for the fact that, on

paper, their portfolio might shrink for a little while.

Never forget that for most clients, investing is largely

an emotional endeavor, and a long-term focus

coupled with good communication skills minimizes

the possibility of a client’s panic working against

them.

2

S&P 500 Intra-Year Declines vs Calendar Year Returns

Source: FactSet, S&P, J.P. Morgan

Despite an average intra-year drop of 14.6%, annual

returns were positive in 24 of the past 31 years

Managing Client Expectations In Volatile Markets

Incorporating a healthy amount of dividend stocks, for example,

could also be a good place to start, because these stocks tend to

dip less than non-dividend stocks when the market falters.

Another potential effective strategy is to invest in actively-managed

funds. Whereas index funds have to ride the wave all the way to the

bottom, portfolio managers of actively-managed mutual funds have

the ability to help ease the down performance by actively pivoting

out of failing sectors.

START PLANNING TODAY

It takes two consecutive quarters of negative growth to confirm

that the economy is in a recession. By the time we know we’re in

one, it’s probably too late to do much about it, in terms of portfolio

positioning. With the right strategy and mindset, financial advisors

can use market downturns to their advantage, strengthening their

clients’ trust in them.

To recap:

•

Time in the market, not market timing, has been on key factor

in capitalizing on stock market gains.

•

Keep things in perspective – both bull markets and bear

markets have a beginning and an end.

•

Focus more on coaching clients on the drivers of market

changes to help them in times of volatility.

•

Communication is key to building client trust and is the

foundation of the advisor’s value proposition.

•

Control what you can –

risk, cost, time, emotions – and less on

returns.

By remembering these important concepts, you and your clients can

be better prepared for the next sustained market downturn.

Interested In More info?

For questions or to speak with a relation-

ship manager about adding any of the 10

Buffalo Funds to your portfolio, contact:

Christopher Crawford

ccrawford@buffalofunds.com

(913) 647-2321

Scott Johnson

sjohnson@buffalofunds.com

(913) 754-1537

Opinions expressed are subject to change at any time, are not guaranteed, and should not be considered investment advice. The S&P 500 Index is a

capitalization-weighted index of 500 large capitalization stocks which is designed to measure broad domestic securities markets. It is not possible to invest

directly in an index. Index performance is not illustrative of fund performance. Fund performance may be obtained by calling (800) 49-BUFFALO or by

visiting buffalofunds.com.

Diversification does not guarantee a profit or protect from loss in a declining market.

Mutual fund investing involves risk; Principal loss is possible. The Funds may invest in smaller companies, which involve additional risks

such as limited liquidity and greater volatility than larger companies. The Funds may invest in foreign securities which will involve political,

economic and currency risks, greater volatility and differences in accounting methods. This risk is greater in emerging markets. The Funds

may invest in lower-rated and non-rated securities which presents a greater risk of loss to principal and interest than higher-rated securities.

Investments in debt securities typically decrease in value when interest rates rise. This risk is usually greater for longer-term debt securities.

The Funds’ investment objectives, risks, charges, and expenses must be considered carefully before

investing. The summary and statutory prospectuses contain this and other important information about

the investment company and may be obtained by calling (800) 49-BUFFALO or visiting buffalofunds.com.

Read carefully before investing.

Kornitzer Capital Management is the advisor to the Buffalo Funds, which are distributed by Quasar Distributors, LLC.

Buffalo Funds Family

Discovery Fund

(BUFTX / BUITX)

Dividend Focus Fund

(BUFDX / BUIDX)

Early Stage Growth Fund

(BUFOX / BUIOX)

Flexible Income Fund

(BUFBX / BUIBX)

Growth Fund

(BUFGX / BIIGX)

High Yield Fund

(BUFHX / BUIHX)

International Fund

(BUFIX / BUIIX)

Large Cap Fund

(BUFEX / BUIEX)

Mid Cap Fund

(BUFMX / BUIMX)

Small Cap Fund

(BUFSX / BUISX)

ABOUT THE BUFFALO FUNDS

The Buffalo Funds are a family of 10 actively-managed mutual funds offering a variety of domestic equity, international equity, and

income-generating investment strategies. We believe patient investing, backed by solid intelligent research, is the best way to achieve

potential long-term financial rewards. Disciplined investment decisions are made using a distinct, time-tested investment approach

guided by trend analysis, rigorous fundamental company research, and strict security valuation parameters.

Our fund family is characterized by a long-term growth investment strategy and a team-based, idea-sharing management style.

“Trends and Patience” is our mantra, and our great strength.