As you know, markets have been volatile ever since Coronavirus became a global epidemic. From the all-time high of 42,273.87 points on the S&P BSE Sensex (made on January 20, 2020), we ended at 31,390.07 points as of March 16, 2020. That is a -26% correction in less than two months.
The S&P BSE Sensex, after a sharp fall, has displayed an impulse or regained some ground (at the time of writing this piece). But can this be called a recovery?
The answer is ‘no’ unless a clear trend is visible.
Graph 1: Early indications of S&P BSE Sensex slipping into a bear phase
Data as on March 16, 2020
(Source: bseindia.com, PersonalFN Research)
In the last couple of months, the broader index has fallen like ninepins. Clients are panicking… obviously, anyone would as the rise in volatility is very apparent.
This is a tough time to be a financial advisor.
Advisors are facing endless questions from investors. Some typical ones are as follows:
- Should I withdraw my investments from equity markets?
- How deep markets can go from here onwards?
- Will markets recover soon or will they take time?
- Should I pump in more money since markets are down?
- I am earning poor returns on my Systematic Investment Plans (SIPs); shall I discontinue them?
Here’s how financial advisors can handle investors’ queries more effectively during market downturns:
Be a counsellor
Advisors must understand that unlike you, investors may not understand the nitty-gritty of the markets and may get paranoid by market falls. As their advisor or financial guardian, you need to educate them. Be a good counsellor, one who understands their worries and addresses their concerns. If they ask for any specific information, first, provide them with accurate information, even if you think that could be unimportant.
Review the asset allocation
Advisors should take advantage of market falls and revisit their investor’s asset allocation. Ensure if that’s still in line with their investment needs and financial goals. If other asset classes have overshot their respective allocations as per the initial plan; then you, as their advisor or financial guardian can suggest that they increase investments in equity assets. In contrast, if their equity assets have shot the upper limits set in the original plan, then suggest timely exits.
Review the mutual fund portfolio (backed by thorough research)
Often, investors get tempted to discontinue their SIPs when they see poor returns. As their financial guardian, discourage them from taking such a step. Instead, highlight why you have recommended SIPs in certain schemes. That said, thoroughly analyse their mutual fund portfolio and see if any of the schemes need to be swapped with better ones. As you would agree, volatile markets test the skills of fund managers.
While restructuring the portfolio, always rely on process-driven fund houses rather than selecting schemes based on their past performance track records which may or may not be sustainable in the future. Also note, fund houses that depend excessively on individual fund managers often suffer when their star fund managers resign from the fund house.
Ensure the portfolio is strategically build based on the ‘Core and Satellite’ approach
The ‘Core and Satellite’ investing is a time-tested strategy to build an investment portfolio. For the mutual fund investors, the ‘Core portfolio’ should consist of large-cap, multi-cap, and value funds, and the ‘Satellite portfolio’ may include large & mid-cap, mid-and-small cap funds and aggressive hybrid funds.
Some investors might ask why can’t they invest just in mid and small-cap funds since their time horizon is 5 years+ and the NAVs of small and mid-cap funds (plus the mid-cap and small-cap indices) have fallen a lot.
Explain to them that they should follow the ‘Core and Satellite’ approach for the following reasons:
- To attain optimal portfolio diversification
- To stay away from all market noise without letting the portfolio suffer
- To offer greater stability to the portfolio and avoid unnecessary churning
- To benefit from the dual investment strategy
- To create wealth and curb the downside risk to the portfolio substantially
Ideally, the ‘Core’ holdings should form 60-65% of your mutual fund portfolio, and the remaining 35-40% can consist of ‘Satellite’ holdings. Weightage of each portfolio constituents in both ‘Core’ and ‘Satellite’ categories can make a huge difference in the end.
What matters most is the art of cleverly structuring the portfolio by assigning weights to each category of mutual funds and the schemes picked for the portfolio.
Unless you, as the advisor, monitor your clients’ portfolio and recalibrate the weights as per the market dynamics, especially for the ‘Satellite’ part of the portfolio, it may not derive the real benefits of the ‘Core and Satellite’ approach.
Set the return expectations right
Sometimes, investors have unrealistic expectations. As their financial guardian, address their concerns and guide them skilfully, so they begin to have rational expectations in their journey of wealth creation.
Explain to them that risk-and-rewards go hand-in-hand. Rather than setting return expectations randomly, link it to their financial goals is necessary.
If you can explain and educate investors on this aspect, it may not only release the unnecessary pressure on you, their advisor but also help investors/clients stay calm under testing times like these and avoid committing investment mistakes.
And last but not the least, be empathetic towards them, show integrity, and handle your clients’ money with as much care and prudence as you would do with your own.