Setting Client Expectations in 2020

January 23 2020

Do you have your crystal ball ready? It’s the beginning of a new year, which means it’s time for everyone to make predictions about what’s in store over the next 12 months. Clearly, no one can predict the future. However, that doesn’t stop analysts from giving their best attempt.

As you can imagine, the economic predictions for 2020 are all over the map. Below is a sampling:

An analyst on TheStreet.com predicted that there would be more volatility but the major indexes would still be up approximately 5%.
An analyst on nasdaq.com predicted that the indexes would decline in 2020.
Goldman Sachs predicts that economic growth will accelerate in 2020 and that the risk of a recession will drop.
The Federal Reserve predicts the economy will grow in 2020, but at a slower rate than in 2019.

Of course, the so-called “experts” aren’t the only ones making predictions. Your clients likely have their own predictions. They may even ask you to make your best guess about where the markets will go over the next 12 months. Of course, your clients can’t base their strategy off short-term predictions because many of those predictions will prove to be incorrect.

Do you have clients who are anxious about the year ahead and ready to make impulsive changes to their strategy? Below are some tips on how you can help them stick with their strategy in 2020:

Help them focus on the long-term.

It’s natural for clients to feel anxious because of negative predictions or volatile financial news. It’s also natural for them to forget that downturns are usually temporary. After more than a decade of positive returns, any negative news could feel like the beginning of a downturn for many clients.

Some education about market history could be helpful for your clients. As you know, there are two types of market downturns: a correction and a bear market. Corrections are downturns with losses of 10% or more. Bear markets are downturns with losses of 20% or more.

The average correction has a loss of 13% and lasts only 4 months. On average the market recovers from a correction after 4 months. Bear markets generally last longer and have steeper declines. They have an average loss of 30% and last for 13.2 months. However, the market usually does recover and does so on average in about 22 months.

No one can predict when a bear market will begin or end. That also means no one can predict when the recovery from a bear market will start. If your client takes impulsive action because there’s a prediction that the market may trend down, they could miss the bear market, but also the recovery. Or the prediction could be wrong and they could miss out on continued growth. Instead, help them focus on the long-term and avoid emotional decisions based on short-term predictions.

Talk through the issues in the news.

Of course, this year is unique. There are plenty of issues in the news that could create anxiety for investors. It’s an election year, and it could be one of the most heated in recent memory. For only the third time in history, a president is facing impeachment. The United States is in an ongoing trade war with China. Tensions with Iran have raised prospects about war.

Any of those issues are enough to create anxiety for investors, especially those approaching retirement. However, again, history can provide a guide to help your clients avoid impulsive decisions.

Take the election, for example. An election, especially a heated one, can certainly create anxiety. However, the markets’ performance during election years have been consistently positive.

There have been 23 election years since 1928. In those years, the S&P 500 has had an average return of 11.28%. In fact, out of those 23 election years, there has only been a negative annual return four times:

1932 – Great Depression
1940 – World War 2
2000 – Tech Bubble
2008 – Financial Crisis

Very often there are other events or issues occurring that contribute to market declines. It’s difficult to make a determination that the political noise created by an election contributes to market volatility. In fact, out of the 23 election years since 1928, 19 have had positive returns for investors

Guarantee their retirement income.

Are your clients approaching retirement? The most effective way to reduce their worry about short-term developments could be to guarantee their long-term future. A fixed indexed annuity could provide them with protection against downside risk and with guaranteed lifetime income. That could help them focus less on short-term predictions and more on their long-term goals.