Do you remember that time when a single tweet cost Amazon six billion dollars? What about a billion dollar Snapchat nosedive? Regardless of your personal feelings about the Donald Trumps or Kylie Jenners of the world, the fact remains that some individuals seemingly wield a ton of power at their fingertips. News travels instantly, which sometimes results in sudden declines that are unpredictable.
We’ve discussed that yes, volatility still exists, and we’re in a time where isolated events like these have the potential to cause a lot of headaches. Do these dives cause lasting damage? Of course not. Jeff Bezos was just declared the wealthiest person in the world according to Forbes’ 2018 list, so he’s probably doing just fine. Snapchat’s profitability/valuation/design concerns aside, Kylie Jenner’s tweet wasn’t even a blip on the “market meltdown” radar. So can power this short-lived even be considered power at all?
Not really. The president may have facilitated the change, a Kardashian may start the conversation, and some investors may have panic-sold, but as is often the case, reason ruled the day and things evened out relatively quickly. It’s not the individual that makes the difference, not in the long run. We think it’s your clients and investors like them with the actual power, and market data supports that.
Herding behavior is a phenomenon seen most often during intense market conditions, and in times of fear usually creates a widespread “flight-to-quality” response that bolsters “safe” investments (bonds, gold, et al.). When these events happen, investors panic and either regret the risks they took or sell to stop the losses. Market sentiment is fickle and short-lived. Herding events usually take some time to gain focus, whereas events like the above are just a single point in time and just affecting a single stock. In contrast, herding is a marketwide behavior. But that’s where the true power lies—it’s the buying power of millions of investors over an extended period where real change is exerted. Rome wasn’t built in a day—and neither was Twitter.
As an advisor, you’re the best resource for explaining this power to your clients and the first line of defense for setting the right expectations. The risk-first approach works, and investors that work with Nitrogen advisors have the knowledge and power to invest fearlessly. When investors are invested right, and when they’re flexing their muscle en masse, only then can real change happen. It takes a lot more than one person to derail our best-laid plans.
Advancements in fintech and investing happen because people demand it. In our monthly Fintech Report Card, we’ve reported on the increased offering of Socially Responsible Investing options by large firms to their clients. According to a Morgan Stanley report last year, this type of investing grew 33 percent between 2014 and 2016. Changes like what we’ve seen with SRI occur because an increased population asks for it, and as more adopt and embrace certain ideas, they become more available.
Tariffs on aluminum and steel have also been a hot topic and there’s been a ton of debate on what industries and companies might be affected. It’s still too early to say what will happen, but that’s one of the aspects that should be most encouraging to your clients, and one of the easiest expectations to communicate: change takes time. Economic policies are a long-term solution, which makes stress tests an excellent tool you can use to help clients visualize the potential changes they’ll encounter. We created Scenarios especially for, well, scenarios just like this. You can track different industries through time through a variety of market events. Create a custom scenario showing the last time steel stocks fell to demonstrate the risks associated with having a concentrated position, and use that data to make an informed decision.
Advisors have the tools to invest their clients in strategies that work for them in the long term, that coincide with their individual risk tolerance, and meet their needs on a personal level.
So who has the power and who’s making the rules?
Your clients.