Answering Your Clients' Questions About Recessions
July 28, 2020
As a Wealth Management Advisor, you understand that a recession is full of economic hardship, but it also presents opportunities — both while it’s happening and when it’s over. Your clients, on the other hand, may find it difficult to stay positive during tough times, especially when they might not fully the impacts of a recession.
You can equip your clients with the information they need to weather a recession without abandoning their financial goals. This means helping them establish a strategy to both survive the recession and thrive when it’s over. Here’s how you can approach the recession talk with your clients.
What Is a Recession?
To explain a recession in layman’s terms, it’s important to be familiar with the official definition. The National Bureau of Economic Research (NBER) defines a recession as “a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real Gross Domestic Product (GDP), real income, employment, industrial production, and wholesale-retail sales.”
You can simplify it for your clients by explaining that a recession is marked by a general decline in economic activity. In order for a period of time to officially be deemed a recession, there must be two consecutive quarters of negative GDP growth. Several factors can contribute to a recession, including a financial crisis, sudden economic shock, widespread natural disaster or human-caused hazards, such as a pandemic.
While it’s important to explain to your clients the potential hardships of a recession, it’s also critical to help them understand it’s actually a necessary part of the economic cycle. It helps to create a balance of economic expansion and contraction, and the economy has always bounced back once a recession is over.
How Long Does It Last?
It’s understandable for clients to want to know when a recession will be over, but unfortunately, there’s no set amount of time — it can span anywhere from a few months to a few years. However, NBER does track the average length of recessions. According to its data, the average recession between 1945 and 2009 lasted 11 months.
Do They Need to Change Their Investment Strategy?
A recession is not a reason to change your clients’ overall investment strategies unless they have experienced a change outside of the market factors (such as a job or retirement timeline change). However, a recession does create opportunities, including new investment opportunities. Let clients know that together you can alter their financial planning to take into account their current situation.
Talk to your clients who are avid investors about being cautious while actively monitoring the market and capitalizing on chances to acquire high-quality assets at lower-than-normal prices.
As a broader message for all of your clients, you can offer these investment guidelines to follow during a recession:
Don’t sell off all your stocks. The stock market can be volatile during a recession, but historically it has always rebounded. While it’s tempting to get rid of underperforming stocks, selling them at a lower price than clients bought them at doesn’t do any good, especially with high-quality stocks. It’s best to hold onto them and ride out the storm — better days lie ahead.
Invest in consumer staples or utilities. If a client is looking to buy more stocks (or shift ownership to “safer” stocks), point them toward consumer staples and utilities, as people will always need essential items like food, water and gas — even during a recession.
Consider dividend stocks. Historically speaking, dividend stocks have provided a solid source of income during recessions. If your clients do buy dividend stocks, however, they need to keep an eye on dividend cuts, which can cause them to become an overall bad investment.
Be aware of what’s going on. More than anything, it’s imperative that you teach your clients to always pay attention to market trends and keep an eye on both what they currently own and what they’re interested in buying.
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