One of the best ways to help clients keep their nerve in a down market is having emergency savings to fall back on.Nuthawut Somsuk/iStockPhoto / Getty Images
The past couple of months seem almost to have been designed as a test of investor resolve. After all the market havoc around tariffs, the S&P 500 is just about even for the year, while the TSX hit a record high Thursday. Sure, there may have been buying opportunities, but those who held steady probably fared best.
Paolo Costa, senior behavioural economist with the Vanguard Group Inc., says this is the kind of environment in which advisors prove their worth.
“Staying the course for me means staying invested according to your plan, but it goes beyond doing nothing,” says Mr. Costa, who was in Toronto this week.
It could mean continuing to make monthly deposits, regardless of market noise, or rebalancing portfolios after the dip in equities.
According to Mr. Costa’s research, one of the best ways to help clients keep their nerve in a down market is by having emergency savings to fall back on.
“What we have found is that even clients who have only US$2,000 in emergency savings, that’s the strongest predictor of a client’s financial well-being,” he says, adding that building up cash to cover three to six months’ worth of expenses goes even further in insulating clients from market noise.
“That level of money set aside in case of emergency brings a lot of peace of mind. That’s one of the things that’s going to help clients stay the course because they know there’s a buffer between them and whatever may be happening in the world,” he says.
But while markets have rebounded, the tariff reprieve may only be temporary, meaning the uncertainty gnawing at clients may persist. Canada’s unemployment rate rose last month to 6.9 per cent as U.S. tariffs hit the labour market, while home sales in Canada were down 10 per cent in April from the previous year. How to get on with one’s life and make decisions about buying a home, starting a family or retiring when the tariff outcome is still unknown?
Lisa Kramer, finance professor at the University of Toronto, says one method to help with big decisions is imagining a range of possible future scenarios – for example, a spike in interest rates after buying a home.
“If the answers don’t paint a rosy picture, it may be best to modify the house you have in mind or postpone the purchase altogether until your budget is more robust,” she said in an e-mail.
In addition to plotting scenarios and creating market buffers, advisors are providing value as emotional buffers during stressful times.
Most clients prefer not to spend a lot of time thinking about their finances, and Mr. Costa says Vanguard’s research shows that advised clients spend about two hours a week less worrying about money than other people do.
In moments like these, that’s not a bad offer.
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