The new year brings new predictions. Almost everyone turns into a prognosticator, guessing how markets will perform and what geopolitical events will unfold.
This article was originally posted on Investor's Business Daily on January 2, 2018.
Unlike bloviating TV pundits, advisors tend to refrain from bold predictions. But their prudence is put to the test when clients press them for answers.
Problems can arise when clients expect their advisor to forecast how markets will move in the months or year ahead. While advisors usually prefer to hedge — and redirect clients' attention to financial matters that they can control — some individuals may still assume their advisor should be able to see the future with some level of precision.
"A small group of clients will ask for your predictions every time they see you," said Mark Fried, an advisor in Newtown, Pa. "And in December and January (during our annual review), a lot more of them will ask. That's especially true now when the market has gone up for so long. They want to know when it's going to end."
Author of "Road Rules for Retirement," Fried has a standard reply. It involves a prop that he keeps nearby.
Vacationing in Mexico about 25 years ago, he bought a crystal ball. Whenever clients ask him to predict the future, he gestures to the orb and replies, "I'm not sure. Let me check."
Clients usually laugh, and Fried makes his point: It's foolish to pretend we know what will happen and plan based on such unknowns.
Advisors who avoid making predictions still give considerable thought to the future. But rather than speculate about market swings or other variables, they work with clients to plan for a range of scenarios.
Fried likes to explore how economic and political conditions might change over the next six months or year. Then he'll explain how such changes could affect a client's portfolio.
To reinforce his point about the limited value of even the most confident predictions, Fried invites clients to note every forecast that they hear or read in the media. When they review the list a year later, the results are predictably awful.
Seasoned advisors understand that clients' eagerness to know the future often masks a larger concern. Their deeper anxiety may revolve around whether they're positioned to weather storms — from market meltdowns to global trade disputes.
Having a detailed financial plan in place can reassure clients that they can rest easy regardless of any foreseeable market shocks.
When Jason Staley's clients ask for his predictions, the Pittsburgh, Pa.-based advisor responds by reviewing their investment policy statement and asset allocation. They see how he has designed their portfolio to withstand a range of outcomes.
"I've learned to navigate the conversation back to things that are time-tested and true," Staley said. "When clients try to pin me down, I might say it's a coin flip" and shift attention to their customized financial plan.
A Narrow Range
Clients with more aggressive risk appetites may look to their advisor to predict moves in Bitcoin or the CBOE Volatility Index (VIX). Few planners oblige.
When Pat Kelly's clients ask about Bitcoin, the Detroit-based advisor emphasizes the highly speculative nature of that investment. If they continue to show interest, he refers them to Coinbase, a digital currency exchange.
Like many advisors, Kelly has learned over the years to scale down his predictions. He says that early in his career, he'd offer a narrow range based on what he set as a target average return for the coming year.
"I'd give a tighter, more specific range," he said. "Now I'll give a wider range. I'll draw a big bell curve for the client and say, 'You need to get comfortable with this range. If I get more specific, I'll probably be wrong.'"
If clients want more concrete predictions, Kelly plays market historian. Rather than look forward and guess, he'll look back and draw lessons.
"I might say, 'Let's stress-test different market environments based on a period of rising interest rates,'" he said. Analyzing historical data can provide at least one indicator of what the future holds.
He also likes to remind clients of their overall investment objectives. Otherwise, they might get too immersed in day-to-day market swings.
"If you get caught up in the weeds, you can make more emotional decisions," Kelly warned. "I'll tell clients who ask for my predictions that the reality is, regardless of my answer, my goal is to help them achieve their retirement goals over the next 10 years or more."