Providing calm to clients through rocky times

While worldwide tariffs are still uncertain, the stock market has mostly recovered the 14% it lost during the enforced tariffs of early April 2025 … and then some. Investors who stayed the course are no worse for the wear. However, millions of investors who fled to cash during the early days of the tariff announcement missed out on a 20% recovery; that’s $200,000 for every $1 million they invested. And then there are the capital gains taxes they’ll have to pay on long-term gains (15% to 20%) or short-term gains (up to 37%) at the federal level.

Helping your clients during stressful times should be part of the advisory conversation. You can be an emotional circuit-breaker or a trusted ally who prevents your clients from engaging in emotionally-driven, wealth-destructive behavior. I talk more about these fundamentals of behavioral finance in Holistic Guide to Wealth Management.

While the most recent recovery in the markets allowed investors to breathe a sigh of relief, it should also be a wake-up call to anyone who is retired or planning to retire in the next few years. From where I sit, chaos and lack of clarity are likely to be the rule, not the exception, for the foreseeable future.

Sequence risk

People who have more than five years until retirement have plenty of time to ride out the storm, but for new retirees and near-retirees, a market meltdown can be devastating without the right planning in place. In behavioral finance we call that “sequence risk,” aka “sequence of returns risk.” A major drop in the early years of retirement—or right before retirement—can wreak havoc on your client’s estate plan. When they tap into their portfolio for income, they must sell more investments to raise a set amount of cash. Not only does that drain their savings faster; it leaves them with fewer assets to generate growth and returns. By contrast, if a decline occurs later in retirement, retirees may not need their portfolio to last as long or to continue growing to fund a long retirement.

The chart below, courtesy of Schwab, illustrates a sequence of returns risk. Investor 1 and Investor 2 both began retirement with $1 million portfolios, and both endured a 15% decline in their portfolio during retirement. However, because Investor 2 was in the 10^th and 11^th years of her retirement, the impact on her nest egg was much less severe than for Investor 1 who took the 15% hit during his first two years of retirement and never fully recovered.

Because of sequence risk, you can remind clients to have their financial plans “stress tested” at least once a year to see how well their nest egg would hold up under various potential shocks to the stock market and economy. It’s a great way to provide year-round planning for your valuable clients.

Risk tolerance

Risk tolerance is an investor’s ability and willingness to endure market fluctuations and potential losses without abandoning their investment plan. This is about each client’s psychological comfort with uncertainty; no two people have the same tolerance for risk, regardless of their age, gender, occupation, or financial upbringing.

The traditional age-based parameters for determining how much risk a client should have in their portfolio no longer cuts it. For instance, Nitrogen research shows that more than half (52%) of investors in their 20s do not fit the “aggressive” stereotype, and more than half (53%) of investors in their 70s do not fit the “conservative” stereotype. The takeaway? Don’t let your clients’ investment advisors build cookie-cutter portfolios for them based solely on their age. Make sure those advisors get to know your clients and their goals at least as well as you do. 

While many clients will tell you they have a decent tolerance for risk, you won’t find out for sure until you see how far they allow their portfolio to fall before they capitulate by starting to sell all of their stocks, and moving into cash or Treasury bonds. We saw an awful lot of capitulation when the tariffs were announced; many who capitulated are now sorry and embarrassed.

However, you could also be doing a disservice to your clients by encouraging them to remove too much risk from their portfolios. If they don’t have a certain amount of their portfolio in risk assets such as stocks, they may not have enough potential upside to reach their financial and life goals.

If you don’t have frank conversations with clients about risk, a market downturn can leave them distressed and questioning their investments. Conversely, during a bull market, clients whose portfolios don’t keep pace with the market’s rapid growth may feel they are missing out on significant returns. Both scenarios underscore the importance of having clear and consistent conversations about risk and expectations to maintain client trust and satisfaction. My friends at Nitrogen, who contributed to my book, have developed a unique Risk Number for each client, on a scale of 1-100, that you might find useful in counseling your own clients.

Loss aversion

Loss aversion is another important behavioral finance concept. Investors can become so fearful of losses that they only focus on holding on to their money rather than on making gains. There’s a biological reason for that. Research on loss aversion shows that investors feel the pain of a loss more than twice as strongly as they feel the enjoyment of making a profit.

For example:

• A client refuses to sell a stock they’ve held for years when rational analysis indicates the stock should be abandoned as an investment.
• A client sells a stock for a tiny initial gain when analysis suggests the stock should be held longer for a much larger profit.

Anchoring bias and the fallacy of breakeven

Anchoring bias is about making a financial decision based on an irrelevant data point. That data point is the anchor, even if it doesn’t have any real information to support it. For instance, during the early days of the tariff correction, stocks were down close to 20% from their all-time high set in February. The headlines were screaming doom and gloom, but savvy CPAs and financial advisors kept their clients calm by reminding them the market was still up more than 100% for the past five years with more than a +12% annualized gain. Just like novice casino gamblers and poker players, many investors can only think about the recent high-water mark for their winnings—not how much they’ve earned from the outset. They’ll keep trying to get back to break even, even if it takes months or years, when their money could be much better used in higher yielding investments.

Again, remind your clients not to fixate on random numbers associated with their favorite index’s recent all-time high: Dow 45,014 or S&P 6,147. It’s more important to stay focused on reaching long-term goals and to make sure their plan is aligned with those goals without taking on unnecessary risk.

Tax advisory is clear

For forward-thinking CPAs and tax accountants, financial planning isn’t just an add-on service; it’s a cornerstone of relationship-centered wealth management that clients increasingly expect from their most trusted advisor. Build your ROR (Return on Relationship) today!

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