5 Investing Challenges Advisors Should Anticipate in 2022

It seems that everyone in the financial industry has a 2022 market outlook tackling investing, economics or trends in the advisor industry and consumer behavior. It's that time of year.

So, how about something a little different? Here is an outlook that zeros in on the most heart-pounding, stress-inducing, nerve-racking and annoying things that advisors are likely to face in 2022.

Advisors should prepare for the challenges 2022 will bring. Here's what to know.

Bad Investing Decisions Inspired by FOMO

Many investors are getting goosebumps over the stock market. While that is understandable after the massive, historic recovery since March 2020, that euphoria is largely misplaced.

A relatively small number of stocks have driven the headline indexes, such as the S&P 500, higher during the past few years. That pattern continued into and following 2020's five-week 33% decline from Feb. 19 to March 23.

If there were an award for investor achievement in the category of selective memory, the past two years would be the winner.

Consider that since the market top in February 2020 through Dec. 10, 2021 – a period of about 22 months – the S&P 500 has appreciated by about 40%. But the Dow Jones Industrial Average is up about 20%, and the S&P 500 Value Index is up about 15%. Many individual stocks are below their 2020 highs and remain flat for the past three years, thanks to a recent, sharp pullback in much of the market.

That's where the FOMO, or the fear of missing out, comes from. It's inspired by a combination of strong returns since the 2020 bottom and amnesia regarding the fact that those returns came from a place where the S&P 500 was starting at 67 cents on the dollar compared with five weeks prior to that bottom.

Investors may be entering an era of sharp pullback, as opposed to the drawn-out bear markets of the past, when digital commerce, investing and the news operated differently than they do today.

In addition, the 2020 bottom was rare from a historical standpoint. So, next time the market suddenly tanks, there is no telling how quickly it will bounce back. This is where you need to step in, be the "party pooper," and present a wider range of possibilities than the assumption that stocks only go up.

Do-It-Yourself Investors Who Think They Know More Than Advisors Do

While stocks have soared from their 2020 lows, it's hard to blame investors for thinking they can do an advisor's job better than the professionals can, at least when it comes to investing. It seems as if every talking head on their smartphone apps claims to be an investment expert. Advisors should help clients understand what fiduciaries do that Instagram financial advisors do not.

This is about helping clients truly define investment success on their own terms, and reminding them that financial advisors are there to be the proverbial angel on their shoulder when the devil on the other shoulder is telling them to trade in their risk-managed portfolio for a lifetime supply of cryptocurrency, nonfungible tokens or whatever next appears on the financial-hype equivalent of a fishing lure.

One solution may be to help clients take big shots with small amounts of money, so they feel they have a piece of the "gravy train" they think they are missing.

Whether it's option-buying strategies with loss limited to the amount you invest, funds with some form of premeditated risk-management technique, or even a small investment in off-the-radar stocks or asset classes, your role as an advisor can include identifying what they do with their "play money."

Economic Headwinds That Aren't Going Away Soon

Whether it's the coronavirus pandemic, rising cost of living, high debt levels, Wall Street speculation on the back of cheap financing or other financial risks, the economy is not likely to simply get better in a flash.

The unwinding of Federal Reserve policy and the monetary tightening domestically and globally will be a process. And during that process, advisors will want to confront those real-world issues and translate them for clients into a language they can understand.

Bond Returns Will Be a Fraction of What They Have Been

As 2021 winds down, there is a possibility that investors will see the two-year U.S. Treasury note's total return end the full year below zero for the first time.

Further out on the yield curve, the five-year U.S. Treasury note's return is hanging near its lowest level since 1994, a year in which the Fed raised interest rates seven times.

At this point, the Fed has not even gone too far into its taper, which is slowing the pace of bond purchases to support the market. Add to that the fact that the stock market is more expensive than it was during that 1994 tightening cycle, and the bond investor is trapped.

This is where financial advisors come in. This bond dilemma is not some unsolved mystery. It is a call for action on your part. Work hard to determine how best to deliver an investment experience to your clients in the absence of competitive bond returns.

Solutions may include embracing a more tactical investment portfolio, adopting more of a long-short or hedged strategy, or a variety of alternative methods. First, explain the problem to clients before they find out about it from a friend or competitor. Then, research and propose your surrogate plan, alongside your equity portfolio.

But in the self-directed investor boom that now surrounds advisors, it is just a matter of time before someone points out to clients that when your advisory fee is deducted from those paltry bond returns, they are losing money to work with you.

Explaining and Rationalizing Market Forecasts by Nonfiduciaries

Let others make predictions. An advisor's job is to make evaluations for clients. You seek input and research from a variety of sources, then filter through that bevy of opinions from outsiders to your clients. The result for each client is a portfolio plan that evolves based on market realities, but with a strong basis in a simple but often misinterpreted concept: the trade-off between the returns they seek and the risk of major loss they are willing to take on to pursue those returns.

Today's investor deals with elevated valuation levels in stocks and bonds, once-in-a-generation inflation fears and the rigors of life amid a new endemic virus.

With all that, plus the mass confusion and volume of messaging and temptations their phones present to them every time they look down, they are forced to bat down that barrage of threats to their wealth like Wonder Woman fights off bullets with her wrist armor.

The year 2022 is your golden opportunity to emerge from the chaos of the past two years and identify yourself as the go-to source for translating these potential retirement-killers into knowledge and confidence for your clients, as well as a sustainable action plan. If you do that, no robo advisor, social media financial guru, or messy financial market climate will dethrone you from your status as the client's trusted investment and financial advisor.