Why don’t casinos have clocks? When you lose track of time, you think you’ve got longer to make money back.

With investing, however, there is a clock, and the alarm is the time horizon; it rings the day the client retires.

But sometimes clients act as if they’ll need the money from their investments tomorrow, even if they have another 25 years. So they panic and try to pull out of markets the moment returns fall.

Spell out their time horizons to save them from making rash decisions.

  1. Paint pictures

    Ask clients to visualize a car’s speedometer. The longer their time horizons, the farther to the right they can push portfolios. Speeding up means more risks but potentially high rewards—you might arrive at your destination more quickly.

    Shorter time horizons mean a lower margin for error and call for moving to more cautious investments. “You slow down with a smooth ride. [You become] safe and conservative,” says Paul Mancuso, CFA, of Moneystrat Securities in Toronto.

  2. Explain timing

    Depending on the goal—saving for a house, or children’s education—the time horizon could be months or decades. Explain you can have multiple horizons and investment approaches, and each applies to different parts of a client’s portfolio.

    Some clients mistakenly assume all their investments must be safe by the time they retire, notes Mancuso. Retirement isn’t the end; the money might have to last another 30 years. So clarify the full span, and what that means as clients hit certain stages. In early retirement, clients could still have a fairly high allocation of equities; once hitting age 75, they might dial down the risk significantly because they don’t have to protect themselves from longevity risk as much.

  3. Modify behaviour

    Time horizons notwithstanding, you’ll never completely cure volatility jitters, says Dan Noel, an advisor with Manulife Securities in Moncton, NB. When markets hit bottom in 2009, the most purchased investments were money-market and bond funds. Clients wanted out; and too often, Noel says, the investment industry just follows their instructions instead of doing what’s right for them.

    If the time horizon and risk tolerance are right, he advises clients to think of market downturns as chances to add to their positions. Explain
    how buying bargains now can bolster the portfolio later—over 20 years, stocks of good companies could rise significantly. Teach clients to look at fundamentals, explain how market cap impacts price, and help them recognize good buys.

  4. Learn their psyches

    You might assume savers understand time horizons, while spenders behave like they need the cash now. Yet Kristi Buchanan, a Sun Life Financial advisor in Victoria, B.C., says, “Savers shorten their time horizons. They like money in the bank. Spenders don’t care if their balance is zero. Their personalities don’t mind risk.”

    So with savers, she explains the lost investment opportunities, and helps them understand how much cash they need to be comfortable. With spenders, she’ll ensure they periodically set aside sums for savings (which can increase when they pay off debt, or get raises).

  5. Stuart Foxman is a Toronto-based financial writer.