Don’t Fear the Risk Bullies

Not only did investors who left U.S. equities since September 30, 2011, miss out on the potential for a positive 30% return on the funds, but they got a negative 2% real return on cash. This is based on representative indexes used for illustrative purposes only, Russell Investments explained in its paper, “The Backside of the Risk Bully.”

Market risks are creating a “horrible conundrum” in which investors are driven to do the very thing they fear most—not invest as much as they could because of anxiety about volatile markets, Timothy Noonan, managing director of capital markets insights at Russell, told PLANADVISER.

To fight these fears, advisers must have constructive conversations with clients and explain to them that remaining engaged in the market—even if it is volatile—is the smart thing to do, Noonan said.

Russell’s paper explains that these conversations with clients engender trust and lead to more purposeful engagement, including the ability to remain committed even in volatile markets. The bad news is that it is a difficult discussion for advisers to conduct because it cannot be an impersonal, generalized message like a market forecast. “Indeed, the effectiveness of the ‘risk right’ conversation depends on each client’s situation being uniquely recognized,” the paper said. “The conversation centers on knowing if a client is over or underfunded for the lifestyle they envision in retirement.”

(Cont’d…)

According to the paper’s authors, successfully coping with volatile markets should not include reacting to economic indicators such as GDP growth or unemployment, because markets do not reflect the current economic situation. Rather, markets respond to changes in expectations and attempt to look to future economic performance.

Russell suggested several methods to face the risk bullies including:  

•  Working with a trusted adviser;
•  Concentrating on the future;
•  Recognizing that there will always be uncertainty; and
•  Making decisions based on the most probable outcomes rather than the plethora of possible outcomes.  

As Russell’s paper said, it is all about “training yourself to be resilient in the face of the risk bully.” After all, risk will always exist.