If you think your clients have had reason to feel uneasy about the investment environment lately, you’re not imagining things. In just the past few months, we’ve seen economic uncertainty, intense political polarization, and superlow bond yields. Yet, at the same time, the stock market kept pushing higher.
In this confusing and sometimes contradictory climate, you may be asking yourself a question: How do I help my clients make sense of all this, keep them investing, and still get a good night’s sleep?
As with any problem, there are multiple ways to go at it But we know there’s one approach in particular that is simple, straightforward, and nearly foolproof: Save more money. Not only can saving more give them a greater sense of control over their investment plans, but it can also help compensate for long-term returns that, in our estimation, could fall short of historical averages.
I love the way one of our investment pros put it. Fran Kinniry this past summer told The Wall Street Journal, “Investing is always a partnership between you and the markets.”1 He explained that the markets carried more than their fair share of the weight for a couple of decades, through the 1990s, providing outsized returns that made the investor’s half of the partnership relatively light work. “But now you are going to have to be the majority partner.”
Sobering? Sure. Hopeless? Definitely not.
Although the “save more” logic is easy for most to grasp, it’s not always easy to persuade your clients to follow it. Bills, illness, the loss of a job—these can affect any of us.
But whatever the circumstances, helping your clients figure out how to save more is worth the effort. It requires them to make difficult decisions to forgo some consumption today to increase the likelihood of consuming (or consuming more) in the future. This is at the very heart of investing. Sacrifices are never fun, so talk to your clients about carrying them out systematically and in doses they will be comfortable with—for instance, gradually getting up to the maximum contribution in their IRA, or adding a percentage point or so to the amount they stash in their employer’s retirement plan. As a point of reference, we generally suggest that investors strive for a retirement savings rate of 12% to 15%, including any employer contributions.
If your clients need more convincing about the wisdom of the “save more” course of action, it might help to show them their alternatives. This list is by no means exhaustive, but it hits on a few of the big ones, and none is without risk.
- Reach for yield. With yields so low on many types of bonds, it’s tempting to find the corners of the fixed income market where payouts are juicier. But with the juice comes considerable risk. They’d be taking on more risk—possibly much more.
- Go all-in on a hot-performing asset class or fund. By now, we know better than that, right?
- Sit tight. This approach isn’t a terrible idea; it’s better than panicking and deciding to just “do something,” particularly if that means changing your approach in response to the markets’ movements.
Here’s the inescapably challenging part of a partnership with the markets: In the short run, the “partner” is fickle, emotional, and wildly unpredictable. But in the long run, the partnership is mostly rational and extremely helpful. Maybe the markets will deliver better-than-expected returns. Maybe they’ll be consistent with our more modest expectations. In either case, a higher savings rate can help put your clients in a better position to reach their goals.
1 Jason Zweig, 2016. The new abnormal: Coping with weirdness in bonds. The Wall Street Journal (July 14).