As a retired financial advisor, the question that I am asked most often is, “Is it safe now to get into the stock market?”
I answer, “No. It’s never safe to get into the market.”
When the market is falling, I hear, “Do you think I should get out?”
Investing isn’t like swimming at the club pool, diving in on sunny days, splashing around, getting out and jumping back in again, but avoiding the water altogether when the weather is disagreeable.
A doctor called at the height of the 9/11 crisis. He wanted to sell everything in his portfolio. “Go to cash!” he demanded. Nothing would dissuade him. His timing was exquisite. He called the very bottom of the market for the first decade of this century.
In the 1990’s, a physician and his wife had over $3,000,000 invested. Empty-nesters, they loved the ocean and had a seasonal home on an island off of the Atlantic coast—nothing but smooth sailing ahead of them. One spring day, their accountant observed that they had not made much money in the market the previous year. The so-called dot.com market was booming. They were missing out. All the cautions about the runaway inflated bull market did not deter them. They transferred their account to a different broker that the accountant recommended. He sold their elegant portfolio of dreadnaught stocks and intrepid bonds, and tossed the cash into technology stocks. Within a few short weeks, their nest egg was eviscerated to less than half. All of it had been dumped into the grossly over valued market when it was within 1 percent of the peak for the century.
Both stories are tragic. Not because of the money that was lost. Dreams were lost. The first client, frightened by the 9/11 attacks, thought that he would get out ahead of everyone else. Tens of thousands were there before him and thousands more piling in behind as well. The second couple, with a fortune secure, lost only because they feared that they were missing out.
When investors do not chart a course for their portfolio, every breeze—favorable or threatening—is cause for alarm. Investing is simple as planning a road trip. It begins with choosing a destination. Departure and arrival times are set given the distance to be traveled and a comfortable driving speed. Plans are adjusted if the calculations turn out to be unrealistic.
Investing begins with simple questions. A destination can be retirement, college education, or buying a new home. The rate of return is rate of speed—the equivalent of the one can expect on average over the lifetime of the portfolio. Higher rates of return are as dangerous as excessive speed the interstate. Destinations need to be realistic. Research may be required. What kind of college education? How big a new home? How much income is needed during retirement?
The two couples, whose stories are recounted earlier, lost sight of why they were investing—their destinations. Journeys are not abandoned because of a flat tire. Nobody gives give up because a detour causes a delay. Being right on schedule should never be reason to drive at excessive speeds that are dangerous to everyone on the road.
Fear is a healthy human emotion. It signals that caution needs to be exercised. It is a non-rational function of the psyche, however. When a person acts only to escape the discomfort of it—to make it go away—the outcome will always be less than optimal. The investors who stayed the course after 9/11 continued to experience a level of fear. But their maturity was rewarded, as history demonstrates again and again. Their funds participated in the recovery from the bottom dollar.
Investors, who fear that they may not earned as much as a selective view of the market may indicate is possible, fear they are being denied more wealth. Their fear leads to a lack of perspective and the greater hazard of losing what they currently possess. When an investor does not know how much he or she needs, no amount will ever be enough and every setback will feel like a disaster. With the destination in mind, however, surges and pullbacks are measured rationally and adjustments, if needed, can be made without panic
Financial advisers make money when their clients buy and sell or change their portfolios. The good adviser will work to prevent a client from making an ill-advised decision, even though it may be profitable for the adviser to go ahead with the requested changes. Investors need to review the interactions with their advisers during periods market volatility. Advisers benefit form taking order form their clients. Not only will they be paid commissions for the trades, they can always deny responsibility for the decision if things turn out badly. The obverse side of the coin is also troublesome. The last thing an advisor wants to hear is that the client is disappointed because of losses that could have prevented or gains that could have realize if only the advisor had done as directed.
Investors interested in eliminating the profit incentive as an influence on their adviser’s decisions should seek an agreement to pay a flat fee to the adviser for managing the portfolio regardless of how many trades are executed. The fee will vary with the size of the portfolio. A limit may apply to the number of trades that can be made in a year, but the number is almost always quite high and should not be an obstacle. The agreement should include a statement regarding regular meetings to review portfolio performance. Retention of the adviser then focuses on portfolio returns and the quality of advice being offered.
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