Recently I received a note from a longtime Human Investing client. He was following up on a discussion we had back in March, where he, like others, was concerned about where the market was headed. Here is a mostly intact version of what he said:

I just wanted to thank you and acknowledge your sound advice eight months ago when everything was running off the edge. Since then, we are up more than $250K (17%) and above where we were then. The reality is that had I pulled out, I would not have gotten back in before missing most of the bounce back. Hindsight can be wonderful when you do not make the wrong decision!  My friend, who sold out in March, is still hanging onto the belief that we are headed down again. Who knows the future.

A DISCUSSION GOES A LONG WAY

The purpose of this note is not to take a victory lap for the advice we dispensed. Instead, it highlights how a discussion can help put investing in perspective in a tense market moment. This client has 50% of their portfolio in safe investments, like high-credit quality bonds and cash. The remaining portion is in broadly diversified equities. Despite having enough cash and bonds on hand to live a decade without having to touch their equities, they had a concern. The discussion with this client revolved around whether they needed more than ten years of cash and bonds to live and focused less on market timing. In the end, it was the client who decided to hold tight, not me. I was the one who removed myself from the emotion of the situation and was there to ask the right questions. 

Throughout my career, my role in the client’s life has evolved. In the mid-90s, we were providing stock recommendations and picking money managers. Today, we rely on trading algorithms from Morningstar and low-cost index funds from Vanguard and Barclay’s. The quantitative work has shifted from money management to financial planning and tax planning/compliance. This work is done by my colleagues at Human Investing: Andrew Gladhill, CFA, Marc Kadomatsu, CFP, Amber Jones, CPA, and Luke Schultz, CPA. On the flip side of the quantitative work is qualitative research, which involves non-numerical data. Qualitative research comes from our interaction with clients and hearing about their feelings, emotions, and opinions. These qualitative insights are paramount to a successful retirement plan. Some might argue that emotion and opinion can derail the best of financial plans. This is at the heart of the above quote. Quantitatively, the client was in great shape, but their “in the moment emotions” almost derailed a great retirement plan. 

Dalbar Inc. provides performance information on the “average investor”. Figure 1 is a chart I have tracked for years. One of the many reasons why the “average investor” does so poorly versus the returns of various asset classes and stock/bond mixes is due to their emotions. Having someone to talk to about these thoughts and feelings can be helpful.  If the plan permits and valid concerns arise from the discussion, then changes can be made.  However, if the change is not rooted in probability and the financial plan, there is the potential that the decision being made can be harmful.

INVESTING OVER THE LONG RUN

It is interesting to see the S&P 500, dating back to the year I started in the financial services profession. Figure 2 depicts much relevant information. Most notably is the long term upward trending line during my career. If we went back to the early 1900s, the chart would look similar—lots of ups and downs with a trend line that moves up over time. 

Sometimes, the drops in the market happen gradually—as do their recoveries (as was the case in 2000). Other times, market volatility stems from “counterparty risk,” which was the case in 2007 when the housing market and credit created uncertainty. In the most recent case, the severe volatility was brought upon by fear from a pandemic and an uncertain future. Regardless of the reason, volatility is a natural part of investing in the stock market. My observation is that volatility is permanent. Surprises (both up and down) are common. The financial plan, which is a quantitative document developed by credentialed experts, can be worth its weight in gold. It can act as a financial roadmap when you feel lost—and provide an advisor like me the data-points to dispense proper advice during anxious moments.

Related Articles