Many planners I talk with say they educate their clients on a relative percentage basis. For example, they tell them bear markets are defined as 20 percent decreases. This approach may help clients grasp the concept, but it fails to take into consideration how much of their hard-earned money could be lost or how much their retirement assets are truly at risk today, versus previous corrections. Additionally, the client may not realize how that loss could affect their retirement income level.
If our clients realized how much more is at risk today than in 1987 or 2008, I feel they may consider being more conservative with some of their assets. Instead, we hide behind the fact that recent corrections have lasted only “x” number of months or have been only “y” percent in depth. What does it mean to the client? Potentially, a lot of dollars.
In the crash of 1987, the stock market lost approximately $500 billion of market capitalization in one day. That represented a 22.6 percent downturn in the market indices.1 Today, the S&P 500 retains a market capitalization of $19.7 trillion.2 If the same correction/crash would occur, investors would lose $4.45 trillion dollars – nearly 9 times the wealth.
We have a responsibility to protect wealth for our clients – not just grow it. To look at it differently, one of the best strategies to growth wealth is to take away some of the decreases that might happen along the way. There are vehicles designed to assist clients in this regard. In the most recent correction of October 2014, investors lost $1.3 trillion of wealth. However, I’ve always argued most consumers didn’t even feel or see that dip because it happened between statement cycles. (The S&P 500 only lost 1 point between quarterly statements the client would have received.)
When you talk to clients, I’d like you to discuss the real economic value of a correction – in hard dollars. Clients need the transparency of knowing exactly how a percentage change equates to their retirement and potential losses.
The Bottom Line: Don’t hide behind percentages and historical data. Talk real dollars. Clients deserve to know how changes could impact their assets and future retirement income.
2 S&P Dow Jones Indices, Equity, S&P 500 Fact Sheet
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