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How to Advise Clients Who Fear Market Volatility


Clients might lose faith in long-term investing when stock prices fall, but stocks remain a worthy investment when the right strategy is implemented. Here, Bryce Sanders explains why dollar cost averaging might be a good way to help clients face financial fears when it comes to the stock market.

May 9th 2022
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Sometimes, history repeats itself. Years ago, when I was a financial advisor in Brooklyn, New York, a large number of people leaving Eastern Europe, where inflation was high, and settling in the United States. When it came to investing, some people assumed all stocks went up in price, and some went up faster than others. The most recent bull market for stocks lasted about 11 years. Suddenly, clients discovered that stocks can also go down, which led some to lose faith in long-term investing. How should you advise these clients? They may ask, “Why throw good money after bad?” Others might say, “If you find yourself in a hole, stop digging.”   

Stocks have historically been a good investment if you have a long-term view. Let us start by looking at the numbers. The Ibbotson Stocks, Bonds Bills and Inflation (SBBI) chart is a standard industry reference. Large capitalization stocks have averaged an annual return of 10.2 percent between 1926 and 2019. Government bonds average a 5.5-percent return and Treasury Bills follow at 3.3 percent. Meanwhile, inflation averaged 2.9 percent over that period. Small capitalization stocks averaged 11.9 percent during the same period. The stock market has done swell over time.

If clients invest in the stock market, volatility comes as part of the package. As Warren Buffet once said, “Only buy something you would be perfectly happy to hold if the market shut down for ten years.” His message is to think long term.

The Concept of Dollar Cost Averaging

Clients might think market time is the solution: Sell high and buy back at lower prices. Historically, this doesn’t work. DALBAR Inc. has tracked average stock market returns and the average returns of (stock) mutual fund investors, some of whom attempt to time the stock market.  DALBAR reported that over the 30-year period from 1/1/92 to 12/31/21, the S&P 500 index averaged an annual return of 10.65 percent, while the average mutual fund investor has a return of 7.13 percent.

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