Client Goals Are Not Reduced by Falling Markets

Client Goals and Falling Markets - Investing Wisdom

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The biggest challenge every investor (and, actually, every Advisor) faces is staying fully invested in the face of bad news. It’s only normal to want to escape danger. Unfortunately, fleeing danger means timing the market. The stock market is too fragmented to successfully time over an extended period. In too many ways, tactical asset allocation is churning without the commissions.

The popular notion is that clients and Advisors are far more sophisticated that they were only a few years ago.

In terms of the research and technology at our disposal, that’s true. In terms of dealing with human emotion, that’s impossible. Nobody sticks around to see if the snake is non-poisonous.

Walter Cannon Bradford, chairman of the Department of Physiology at Harvard Medical School, coined the phrase ‘flight or fight response’ nearly 100 years ago. He was referring to an animal’s response when confronted with danger. When a cat is about to be attacked by a dog, its heart rate accelerates, its hair stands on end, its pupils dilate and its behavior gets angry and aggressive. Investors do the same thing when the market drops suddenly and viciously.

Markets change constantly, but the reasons people invested rarely change.

A thousand point gain or a thousand point decline does not alter the fact that we are saving for retirement or building up funds for education.

I am going to make two suggestions.

The first is not to get too enamored with timing the market.

Years ago, certain money managers claimed they could consistently pick tomorrow’s winners. They couldn’t. Today, certain money managers claim they can predict which way the market is going to move when confronted with bad news and then with good news and then with bad news again, ad infinitum. The jury’s out.

I had an interesting conversation with George Putnam a few years ago. We were discussing the myriad of new investments and new asset classes. George was not necessarily opposed to those asset classes, but he asked me a great question. “What’s wrong with the proper mixture of stocks, bonds and cash?” Those asset classes happen to be the ingredients in the batter of the eponymous George Putnam Fund.

The second suggestion is that you make it a habit to continually remind clients of their goals.

Their goal never was to beat the Dow or S & P. Their goal was to build up their retirement fund. Teach them to focus on the destination, not the journey. The simple fact is that the market will go up and down between now and the time they reach their goals.

Reducing risk is within everyone’s rights.

Doing nothing reduces some risk and invites other risk. Buying Certificates of Deposit has the same effect. Diversification reduces risk. Asset allocation reduces risk. And buying and holding reduces risk.

All these methods have their disadvantages. Whichever a person chooses, he or she needs to stick with it. Consistency means staying on track. It’s easy to fly off the track and that’s exactly why good Financial Advisors build guardrails for that track.

The safest place for a ship in a storm may be in port, but ships are built to stay the course. Which is safer for today’s investor, staying the course or continually reacting to ever-changing current events? Time will tell, but I know what my answer is.

There are two kinds of fears: rational and irrational- or in simpler terms, fears that make sense and fears that don’t. ― Lemony Snicket

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