March 03, 2022
A family of 10 actively-managed mutual funds with a variety of long-term investment options.
Managing Client Expectations in Volatile Markets
Managing Client Expectations In Volatile Markets
Managing Client Expectations in Volatile Markets
Setting expectations now will help shepherd clients through any period of
market volatility, including bear and bull markets, corrections, or short-term
recessions.
Clients know in an abstract sense that the market cannot continue to go up forever. But when
it comes to one’s financial future, there’s a huge gulf between knowing the facts and actually
experiencing the reality of a bear market. Even clients who have been through multiple market
drops will still have that instinct to pull their money out of the market or make other drastic
decisions, potentially impairing their financial futures in the process.
We believe the best advice an advisor can give a client is to show them that time in the market,
not market timing, is one of the best ways to capitalize on stock market gains. The chart below
demonstrates how even missing a few days can drastically impact investment gains.
Time in the market, not market timing...
Source: FactSet; Putnam
$10,000 invested in the S&P 500
(value at end of period 12/31/06 - 12/31/21; annualized returns)
From the
Advisor Education Series
$45,682
10.66%
$20,929
5.05%
$12,671
1.59%
$8,365
-1.18%
$5,786
-3.58%
That’s why it’s so important for financial advisors and their clients to agree on a plan now and set
realistic expectations for the inevitable market fluctuations. One of the most important questions
an advisor can ask a client when discussing risk tolerance is “
How much can you lose before you fire
your advisor?
”. That single question could be the main driver of their asset allocation framework.
With that in mind, here are 4 concepts to consider that may help position you and your clients
for any periods of volatility...
Stayed Fully Invested
Missed 10 Best Days
Missed 20 Best Days
Missed 30 Best Days
Missed 40 Best Days
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
3. Communication Is The Foundation Of An
Advisor’s Value Proposition
With the volatility that has returned in 2022, skilled
advisors should welcome this environment as an
opportunity to prove themselves and build lasting
relationships in the process. You can take advantage
of this by putting in place a communications process
that responds to the sharp edges of tomorrow.
When the next recession hits, an advisor will need
to be able to explain why the market turned. If you
can’t describe your process in plain English without
market jargon or prove that you can help clients
weather a financial storm, you may find yourself in
dire straits.
This is where strong client communications
come in. Truly great advisors know that a good
investment plan is just one piece of the puzzle.
It’s being extremely effective communicators that
gives them an edge. Being capable of building client
trust because you can clearly articulate why events
happen, what you’re doing about it, why you’re doing
it – and what might come next – is most valuable
during times of market chaos.
Great advisors know that clients reward those who
can manage their investments, their expectations,
and their emotions. Our industry clearly favors the
analytical, but investors often need more comfort
and compassion. The steps you take today to
communicate with clients and manage expectations
will set the tone for how things will go when the
inevitable downturns arrive.
4. Control What You Can
Certain factors such as portfolio risks, investment
costs, and investment time horizons can be
controlled. A well-allocated portfolio falls easily
under the “what you can control” column and is
a key part of minimizing the impact of volatility.
However, factors such as excessive spending levels
and irrational behavior can be more devastating to a
portfolio than unexpected market losses.
Additionally, keeping a portion of a client’s wealth in
liquid assets ensures they have access to funds when
they need it. Cash, government bonds, and CDs all
have their place in the safe asset category.
3
Optimism
Excitement
Thrill
Euphoria
Anxiety
Denial
Fear
Desperation
Panic
Capitulation
Despondency
Depression
Hope
Relief
Optimism
Point of maximum
financial risk
Point of maximum
financial opportunity
“Wow, I feel great about
this investment!”
“It’s just a temporary
setback. I’m a long-term
investor.”
“Maybe it’s time to get
out of the market.”
The Cycle of Market Emotions
Risk
Cost
Time
Returns
Risk
Cost
Time
Returns
You Can Control...
You Can’t
Control...
Investors RARELY Focus On...
And ONLY
Focus On...
HOWEVER...
Focus On What You CAN Control
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.
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