How to educate clients that there are opportunities in the market at almost any time
“No one rings a bell at the top or the bottom of a market.” You have heard this saying about the stock market many times. Many people actually find themselves waiting for the perfect moment to invest, then realize that moment came and went and they only noticed afterwards. As a financial advisor and wealth professional you know there are many good moments to invest in the stock market.
Have you ever driven home late at night on a long avenue with no traffic? You are hoping for that moment when the traffic lights turn green for the next 10 blocks! That doesn’t happen in the stock market. As a financial professional you can make the case why there is opportunity in the market at almost any time, if you approach it with optimism and the right frame of mind.
1, Interest rates are rising. There are times when interest rates go up. This can be a negative for many industries because it makes new ventures more expensive. Raising rates is what central banks do to slow down an overheating economy. What about companies in certain industries that benefit from rising interest rates? Your firm should have recommendations in that area.
2, The stock market is falling. Many investors think of the “stock market” as this huge blob. If the S&P 500 index is falling, then all 500 stocks are heading down at the same speed. The S&P 500 index is composed of 11 sectors. They do not all move together in lockstep. Some rise or decline less than others. When you were in school you might have received an overall grade point average but you took multiple courses, each with it’s own grade. Some sectors may be doing better than others because of sector rotation. Imagine the stock market is a car making a noise. It pays to look under the hood.
3, Contrarian strategies. There are investment strategies (and products based on those strategies) meant to move opposite to the prevailing direction of the stock market. An example (not a recommendation) is the “Dogs of the Dow” or “Dow10” strategy. The investor buys equal amounts of ten stocks in the DJIA 30 stock average with the highest dividend yields. These stocks are often going through a rough time and trading near lows, hence the high dividends. A year later you replace those ten stocks with the ten showing the highest dividend yields at that moment. A stock generally comes off the list because it has gotten through it’s rough period and moved back up in price. What contrarian strategies does your firm suggest?
4, The concept of defensive stocks. These are stocks providing products and services often considered necessities. Around the time of The Great Recession I recall someone mentioning “the consumer was only buying three things: food, fuel and pharmaceuticals.” The message is people might cut down on some purchases, but they still need to eat to survive. Does your firm like defensive stocks? Which ones?
5, The comfort of the familiar name. This idea shares some overlap with the defensive stock concept. Your client pays bills on a monthly basis. This might include their phone bill and power bill. They might not be planning to buy a new car, but they will buy gasoline at the service station. These stocks usually pay dividends. Clients often assume these firms will be around for a long time. What familiar named companies does your firm like?
6, The flight to quality. This expression is often associated with the bond market. If the economy were to slow, companies with weaker finances could be in more serious trouble than firms with strong finances. This implies institutions and other investors would prefer companies with high safety ratings and strong balance sheets. Those firms often have better liquidity for their bonds too. Has your firm been talking about the flight to quality?
7, Stocks historically increasing dividends. Some investment strategies withstand the test of time. A strategy that has been popular for decades is to invest in dividend paying stocks where the company has a track record of gradually increasing dividends over time. They might not do it every year, but the trend is visible. If you are a buy and hold investor, your dividend yield gradually grows because the company increases it’s dividend payout. What companies does your firm like that fit this description?
8, Total return stocks. Dividends are popular in several, of these ideas. Although income stocks are ones investors might buy because yield is their primary concern, total return stocks are ones where the investor hopes to someday sell the stock for more than they paid while collecting dividends while they are waiting. Some companies have long histories and well-known names. What does your firm like it total return stocks?
9, Growth vs. Value. Let us assume people invest in the stock market to make money. They want to sell the stock for more than they paid. Many people group their stocks into one of two broad categories. Growth stocks tend to have higher rates of earnings grown, pay little or no dividends and are often volatile. Value stocks are often more established companies, pay dividends and have generally slower growth. Both approaches have time periods when they have done well. One advisor likened performance to two lanes of commuter traffic entering a long tunnel. There are times when the car alongside you falls back and times it passes you, but you sometimes exit the tunnel alongside the same car. How does your firm feel about value stocks right now? What about growth stocks?
10, What is the best stock you ever owned? Most investors have a favorite stock. They might have owned it for years and would never sell. Other investors have traded in and out constantly. How is that stock doing now? What do they think of it’s prospects? They might talk themselves into buying more! You need to be aware if your firm has a buy recommendation or a sell recommendation and share that information. You also do not want your client to create a different problem, having a concentrated position.
There may never be that perfect moment to buy stock, but there are many good moments to consider.
Bryce Sanders is president of Perceptive Business Solutions Inc. He provides HNW client acquisition training for the financial services industry. His book, “Captivating the Wealthy Investor” is available on Amazon.