Many investors believe that such elevated levels are a precursor to a substantial market decline. After all, investors reason that past market peaks in 2000 and 2007 were the start of dramatic market corrections.
For advisors, investor ambivalence over equity investing with markets at record high levels presents many challenges, but it is also an attractive opportunity to build strong client relationships. More specifically, advisors can deliver value by helping clients understand the need for equity investing. Advisor should consider illustrating how economic conditions and corporate fundamentals are highly supportive of stocks.
Advisors, furthermore, can address clients’ fears by illustrating how investors who have unfortunately purchased equities shortly before market declines would have recouped their losses over time if they stayed the course.
Back to the Basics
When meeting with clients, advisors can illustrate how equities, over the long haul, have outperformed bonds and cash. The presentation should compare the expected results from different asset allocations on the progress of clients’ expected progress in savings for long-term goals such as retirement. In doing so, advisors can illustrate how the potential long-term gains of equities may increase clients’ chances of reaching their long-term savings goals.
Investing with Indexes at Record Highs
The tricky part, however, is convincing clients to embrace stocks now that equity indexes are at record highs and creating fears, at least among some investors, that a prompt market correction is likely. Yet, advisors can counter clients’ fears by providing a well-reasoned and disciplined approach to equity investing that reflects encouraging economic factors and corporate fundamentals that currently exist.
In recommending stocks to clients, advisors should discuss how economic growth was maturing prior to the corrections of 2000 and 2007 and thus less likely to support additional market gains. In comparison, economic expansion following the subprime mortgage crisis has been weak, suggesting that the economy has substantial capacity for growth, which could sustain the ongoing bull market. This point can be illustrated by showing how unemployment rates, capital expenditures, GDP growth, and other economic factors are substantially different now than during the years leading up to the market crises of 2000 and 2007.
In a similar manner, advisors can illustrate how corporate fundamentals, including cash balances, dividend yields and levels of stock buybacks are all much healthier now than during the years leading up to 2000 and 2007. Advisors may also want to discuss price-to-earnings ratios and other methods of valuing stocks to show that equities are reasonably priced from a historical perspective.
Discussions with clients should also note that periods of market volatility are a natural part of investing in equities, even at times when economic factors and corporate fundamentals are likely to support stocks. To show how the impact of market volatility can be managed, advisors should illustrate how investments made during prior peaks and subjected to market declines would have recouped their full value and possibly gained value if held in stocks over the long term. By providing a thoughtful approach to discussing the merits of equities, advisors can be instrumental in helping clients overcome their emotional aversion to stocks and build strong client relationships.
