In the 1930s Great Depression, much like the downturn of 2008, market technician Ralph Nelson Elliott made an interesting discovery. He noticed equity markets move in similar and replicating patterns. This new field, called Socionomics, explained market movements in response to social mood, both euphoria and discouragement, optimism and pessimism. In fact, Robert Prechter, who recently popularized this area, warned of a top-out in the market in 2000 based on past patterns of market movement and social mood. This major mood swing, called a Grand Supercycle, portends the magnitude of what may happen in the future, while not predicting week-by-week changes; almost like a TV meteorologist is able to warn of storms a week from now because of low pressure areas.
One economist at a conference I spoke at suggested since baby boomers were retiring in such vast numbers from 2000 to 2010, all an advisor had to do was dig a hole in front of where the herd was moving. Good strategy, but if the herd makes a detour, your hole will be empty.
A more important part of this grand market movement is how your clients emotionally respond to these seismic financial changes. It is widely thought we are in a secular bear market due to the levels of national debt. This Treasury debt is competing with private debt, dampening the ability of private capital to influence future investment growth. Yet many seniors believe we are in a bull market recovery. Even if that were so, it will be a very shallow recovery with a great deal of volatility in the short term. If your clients are caught on the wrong side of that volatility, it will greatly impact their retirement lifestyle. Here are two traps your seniors may find themselves in without the benefit of your financial guidance and counsel.
Trap No. 1: "I want to stay with my advisor (even though I have lost 42 percent of my life savings over the last year)."
This stupid investment mistake is called Status Quo Bias. William Samuelson of Boston University showed clients three investment options: one stock with a 50 percent chance of staying the same, another stock with 40 percent of staying the same, a U.S. treasury with a 9 percent return and a municipal bond with a 6 percent tax-free return. Which to choose? Forty-seven percent of those who were told they already owned an investment stuck with the investment they already had. This study showed that people are inclined to stay with what they have no matter how bad the performance. This also explains why some seniors will stay with a bad advisor.
The fix: Tell your prospects about this research and tell them a story about a client who realized this mistake and how well they did by working with you.
Trap No. 2: "I want to keep my money where it is. If I sell now, I will ink those losses."
This stupid investment mistake is called Sunk Cost Fallacy, or throwing good money after bad. These seniors believe their portfolio is still OK until they cash in. They think they can't make changes to the portfolio because it will ink their loss instead of taking the money out and moving into a more sound investment.
