Is 2016 going to be a repeat of 2008 for investors? Do I need to change my financial strategy? What if the Republicans win the election? What if the Democrats do? Will I ever be able to reach my goals? What am I supposed to do now?
Financial advisors field questions like these every day, but in recent months conversations with clients have become even more fraught with anxieties about unpredictable stock market performance and angst about day-to-day finances.
Investor fear emerged as a recurring theme in NerdWallet’s first survey of members of our Ask an Advisor network. We asked about the questions they’re getting from clients, the advice they’re giving, their forecast for 2016 stock market returns and more. We received responses from 200 of these personal finance first responders, who are tax experts, credit counselors and wealth managers.
Among the key findings from our February survey:
Fear is a big threat to long-term success: Advisors say providing financial talk therapy has become a bigger part of the job in recent months. Getting clients to stick with a long-term financial plan requires helping customers manage anxieties brought on by the stock market’s rocky start in 2016.
2016 may not be as bad as many think: When asked if they believe that the U.S. will experience a recession (two consecutive quarters of negative gross domestic product growth) this year, 74% of surveyed advisors said no. As for their one-year outlook for stock market returns, the majority forecast at least partial sunshine: 78% of survey respondents believe the Standard & Poor’s 500 will end the year roughly flat or in positive territory.
But gird yourself for near-term global turmoil: Advisors are concerned about the more immediate effects international instability could have on portfolio performance, with 56% citing weak emerging market growth and 53% pointing to geopolitical instability (such as a potential European Union breakup and Middle East conflicts) as the top threats to investing returns during the next six months.
Here are detailed results from the NerdWallet Advisor Sentiment Survey:
The biggest risk to investors in 2016 is…
Staring at you in the mirror.
Your frame of mind as an investor is one of the top concerns advisors have about your financial well-being and ability to cope with whatever 2016 brings. In response to the question, “What is the single biggest mistake your clients are making?” survey respondents cite the following:
Letting fear drive investing decisions. More than two dozen advisors cite the destructive power of fear — how it freezes people in place or drives them to make overly defensive or risky financial moves.
- “Our clients are well-educated, but many people are letting short-term volatility influence their long-term decisions, even though volatility is normal and should be expected when investing in the stock market.” — Joe Allaria, a certified financial planner at Visionary Wealth Advisors LLC in Edwardsville, Illinois.
- Even investors who keep their wits about them can’t altogether avoid being swept up in the widespread panic: “While none of my clients are panic selling, some are allowing the swings in the stock market to cause them unnecessary stress.” — CFP Steven Elwell from Schroeder, Braxton & Vogt in Amherst, New York.
Forgetting that investing is a long-term endeavor. Advisors note that clients are pushing aside the investing strategies they committed to during calmer times. One explains it this way: “Human nature tends to interpret what is happening right now as an indicator of what will happen for the indefinite future.”
The reaction is akin to long-term time horizon memory loss, with customers “forgetting that they had agreed to ride out corrections in search of long-term returns,” according to one respondent.
“I think the single biggest mistake people are making right now is not realizing how long their time horizon really is. Life expectancy keeps increasing, and even someone who is 60+ years old likely has another 20 to 30 years to live. Maybe more. This means more people have the time to ride through the ups and downs of a market,” says Marc Smith, financial advisor at Red Wave Investments in Dillsburg, Pennsylvania. “The best course of action for most people is to continue with an investment plan designed to meet their goals over a period of years, not over a three- to six-month period.”
Soothing customers’ fears, according to one advisor, requires putting the investing time frame into context: “Clients need to look at where they started and not measure their investment success from the last all-time market high.”
Adopting an overly defensive position. It’s natural that anxieties about recent market events drive investors to seek short-term comfort. Financial advisor Phillip Christenson at Phillip James Financial in Plymouth, Minnesota, says clients are exhibiting “conservative” investing behavior in several ways, such as changing their portfolio allocation away from stocks, reducing their exposure to hard-hit assets and even cutting back on planned contributions.
Brian Murphy, CEO at Pariveda Investment Management in Los Altos, California, is among the few advisors who say that uneasiness about future stock market returns is warranted and that investors should not expect the future to play out like the past or invest based on the established rule book.
“In the past, we have had expected stock market returns of 8% annually,” Murphy says. “Over the next 10 years, that number is more likely to be closer to 1% annually. In that case, the general wisdom on asset allocation will prove to be a flawed method for optimizing retirement wealth.”
However, several financial pros say that being overly conservative is a mistake and warn that investors who move all of their money into cash during a down cycle for stocks will experience disappointing returns over the long haul.
Being wooed into taking uncalculated risks. In contrast to the investors seeking cover are the clients who swing boldly — too boldly — in the opposite direction, chasing returns of hard-hit assets without considering potential risks.
“The single biggest mistake my clients are making is finding stocks that have dropped ‘too much’ and must be bought,” one advisor says. “They don’t understand the risks of catching a falling knife, nor do they understand the reasons why falling knives continue to drop.”
Freezing in the face of uncertainty. Even if clients aren’t panic selling, many of the financial pros NerdWallet surveyed note that it has become difficult to persuade some investors to stay the course, let alone persuade them to invest even more.
- “The volatile market and fearful outlook are giving clients the mental excuse not to continue saving and investing according to their plan.” — Brian McCann, principal at Bootstrap Capital LLC in San Jose, California.
- Inertia isn’t limited to people who are waiting for the market to calm down: “As an accountant/tax advisor, we see clients confused on what type of retirement options to use for this type of savings, i.e. traditional IRA, Roth IRA, SEP, 401(k). Many times they end up doing nothing then panicking as they get closer to retirement age.” — Anita Delventhal, tax advisor and CEO at AG Consulting Services Inc. in Lake Orion, Michigan.
What the smartest investors are doing
They’re largely staying calm, rather than succumbing to the panic, anxiety and inertia that most concern advisors about the challenges investors face in 2016.
Based on history, those who are able to power through the pain eventually recover their losses and then some. That’s how things played out for patient investors during the most recent market crisis, according to data from Fidelity about effects of investor behavior during the 2008 financial crisis and the two years that followed.
Fidelity found that investors who stayed the course from September 2008 to March 2010 saw an average investing account balance increase of roughly 22%. Those who pulled out at the end of 2008 or the beginning of 2009 and stood on the sidelines through March 2010 lost an average of nearly 7%.
2016 stock market returns will be…
A toss-up. Advisors are pretty evenly split in their expectations for the coming year’s S&P 500 stock market index returns. (Remember, the S&P is made up of 500 of the largest publicly traded companies listed on the New York Stock Exchange or Nasdaq and is the most popular proxy for the overall U.S. stock market.)
The majority of the 178 survey respondents who answered this question, 72%, expect 2016 returns in the range of negative 2.5% to positive 10%. That group includes the 38% who think the S&P will deliver positive returns (up 2.5% to 10%) and the 34% who expect essentially flat year-end returns (anywhere from negative 2.5% to positive 2.5%). About 6% of advisors are particularly optimistic about the market in 2016 and expect the S&P to deliver a healthy 10% or higher return.
A notable number of advisors, however, are bracing for the worst: 15% think the stock market will fall anywhere from 2.5% to 10% in 2016, and nearly 7% of respondents expect losses of 10% or more.
Politics and portfolio allocation don’t mix…
More than half of advisors, 53%, believe Americans will vote a Democrat into office in November, 43% expect a Republican win, and roughly 3% say they think voters will check “other” on the Election Day ballot.
Even more pertinent to individual investors, however, is whether the election results will affect their money manager’s investing strategy.
Based on survey results, 87% of respondents say they’ll leave politics out of the portfolio management equation:
- “My allocations are based (more) on economic factors than which party wins the White House.” — Karl Leonard Hicks, CEO of The Leonard Financial Group LLC in Riverside, California.
- “While I am concerned about the election and its results, at this point it does not change the basic premise of how I help my clients.” — Theresa Bailey, owner of Daily Financial Success in St. Augustine, Florida.
… except when they do
What about the 13% of advisors who say that the outcome of the election will influence how they allocate their clients’ money? Answers varied widely, with respondents citing planned portfolio adjustments that ranged from moving clients into assets like gold, allocating a larger portion of the portfolio to cash, investing more heavily in small-company stocks and favoring inflation-protected investing vehicles.
“It depends, but if a Republican wins, I would probably lower my stock allocation. Markets have done better typically under Democrats,” says Allan Moskowitz, a CFP at Affirmative Wealth Management in El Cerrito, California.
One advisor notes that his election-driven allocation strategy depends on how soon a client plans to start drawing income from investments, “keeping those closest to retirement the same.” But for younger clients with a longer time horizon until retirement, he plans to reallocate to a more aggressive portfolio position if a Republican wins, assuming the stock market will do better, and a more conservative allocation if a Democrat wins.
And then there’s the popular election-year topic of taxes: Even advisors who don’t plan to rearrange the investment mix in client portfolios based on election results say they’re keeping an eye on any political maneuvering around tax laws. A handful of the 200 respondents say they’re advising clients this year to allocate a greater portion of their investing dollars toward tax-advantaged investments (by opening a Roth IRA or a traditional IRA).
The survey took place Feb. 5-16, 2016, and was collected using SurveyMonkey. We sent surveys to 1,510 financial advisors who are part of NerdWallet’s Ask an Advisor network, and we received responses from 200. Not all questions required an answer, and participants were allowed to write in free-form answers on a number of questions. Some advisors also chose to remain anonymous or did not want their comments to be made public.
Image via iStock.