Americans tend to be confident, optimistic and fun loving, despite the current market. But the turmoil has certainly increased anxiety and concern. One of the advisor's hardest jobs is helping clients deal constructively, not destructively, with investment uncertainty. What should advisors tell their clients?
A recent Nationwide Financial survey found that three in ten respondents were labeled "cautious." Caution is one way to deal with uncertainty and risk. And believe it or not, the cautious are more likely than others to be optimistic, and to feel financially secure and satisfied with important areas of their lives.
Little surprise, but the cautious are more likely than others to use life insurance, and for that matter, other types of insurance. But what is surprising is that the cautious do not avoid investment risk. They are just as likely as others to take investment risk in order to have a chance of higher returns.
Now compare caution with superstition. Superstition is a method used by a surprising number of people to protect them from things they cannot control. Nationwide found that almost three in ten of those surveyed also say they are superstitious, with one in six being highly superstitious. The survey reminds us that some strategies for dealing with uncertainty are effective; others -- not so much.
This is certainly a time to take on investment risk, since the market has more upside potential than downside potential for the long term. Warren Buffett recently wrote we should be fearful when others are greedy and greedy when others are fearful. By his logic, it's time to invest in equities. But be smart. That means that products that permit investments in equities, but also offer downside protection, should be considered more than before, especially for those near (or in) retirement. For example, annuities that offer guaranteed lifetime income meet the definition of cautious investing. Guaranteed lifetime income protects those who cannot wait out or recover from a downturn.
This is a time when risks should be carefully evaluated and methods for mitigating, not avoiding, risks be utilized. Thus, it's incumbent upon advisors to ensure clients' life insurance programs are up to date and that proper re-balancing has taken place. Clearly, for those in their late 50s and early 60s the decision of when to retire must be made. One should be careful about projecting the investment returns they'll get in the short term. Estimates of the likelihood of future inflation must also be made carefully.
So what do you tell your boomer clients? Caution is the best approach to the current mess. Advisors can help their clients stay invested and stay properly diversified by emphasizing that all will be done with deliberate caution and risk protection.
Mathew Greenwald is president of Washington, D.C.-based Mathew Greenwald and Associates.
