Volatility and client management

What do you do when the markets are volatile?

Well markets are always volatile, are they not? Sadly the markets from 2008 to 2018 have been amazingly well behaved and have not seen any big downside movement. So we all got complacent.

Let us say 2018 is not so great and the market decides to go down 20% – and goes from 35000 to 28000.

What will the client do? He will be hit by behavioral biases. First is the recency bias. He will assume that the market will fall 20% every year…for a few years! We know from experience that this is not true, but the human mind works that way. When we see danger, we CANNOT behave rationally. So in panic the client will want to sell.

He will watch television which loves action. So the ‘experts’ will reach there and say “you must shift from midcaps to large caps” or “you must do asset allocation….” or some such jingoistic shit. So they will want some action – ACTION BIAS. The media will tell him ‘you cannot sit idly and watch your portfolio disintegrate’. They will aid his action bias.

If a client of yours came as a young man to you in the year 1999, remember that the 32 year old is now 51 years of age and he has far more money to lose. In 1999 when he came to you maybe he had only Rs. 10L of investment, but his SIP and a roaring market, and your managing skills have taken the portfolio to Rs. 2 crores. A 20% fall today means a fall of about Rs. 40L – and this looks BIG. He is scared that his portfolio will NOT BE SUFFICIENT for him to retire at 55 as per his plan.

What should you do as an Adviser:

First of all acknowledge that money is an important thing, and a person has a right, and a duty to be concerned. You as an adviser cannot just pooh-pooh the whole idea of volatility. It is a fear that he has seen, and you have to allay. You can tell him that a tiger will just sniff around your feet and go away like a dog, but he has to stand still – NOT YOU. So meet the client, or call a meeting of all your clients to allay the fear.

Ask the client(s) whether they need the money in the next 3-5-7 years.

Ask whether they have enough income sources to meet the requirements or if they have money in debt funds, endowment plans, ppf, bank fixed deposits – these are easier and cheaper to liquidate.

Show them vivid examples of people who sat through tough times. I have friends/clients who invested in Franklin India Prima fund in 1999 and have till date not withdrawn a rupee. Yes it saw tremendous volatility AND UNDER PERFORMANCE. For me belief in the fund house, their processes, and the quality of the fund manager was important.

Show them vivid examples of people who jumped up and down during volatility and lost money.

Most of them would know people from both the categories. That helps even better.

Make sure that you have some mature, intelligent, and calm clients whose behavior is likely to be copied. Let them ask questions and you answer them. If you have had clients who sat through 1993 (I did), or 1999-2002 or 2008/9 it will help. Their SIP graphs will help. Kalpen Parekh of DSP has recently shown a SIP graph running from 2000 to 2018 – such graphs help. When ‘n’ is really long you can explain market rises and falls to be blips, not mountains and valleys as people think.

Give people your phone number. Get on the phone. Have them over. Go and meet them. Have lunches.

Explain to people that in accumulation stage the recovery of the portfolio is helped by the fact that we add units when the markets are down, helping us in the averaging process. TELL THEM HOW they will benefit in 2022 because the 2018/19 purchases was done in a discount sale.

I have no clue where the market will be in 2018 March, forget a longer period. So all the numbers are hypothetical and used ONLY for educational purposes.

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