From the September 2014 issue of Research Magazine • Subscribe!

Crash Course

The shorter days of a waning summer usually herald a season of seriousness, as students of all ages crack open the books and hunker down for the stresses and strains of academic life.

The stock market too is not uncommonly stress-tested at this change of season, which has seen more than its proportionate share of crashes.

From the financial crisis of 1791 to the sub-prime mortgage crisis that began erupting in 2007, both children of September, to the numerous crises of Octobers past—such as the Panic of 1907, the 1929 crash preceding the Great Depression and 1987's Black Monday—a lot more than leaves fall in the Fall.

I am not making any predictions of a market crash. Though I believe the economy and the market are both quite shaky, I lack the ability to foretell the timing.

But I think it wise to stress the role of the financial advisor before such an eventuality rather than after the fact.

It is to be hoped that you have an optimal or at least appropriate investment strategy for each of your clients. Many advisors don't, preferring instead to follow fads.

I can recall the many advisors whose careers ignominiously ended after the Internet stock boom, when clients sued them for what appeared clearly to be ridiculous return-chasing practices that perhaps seemed “smart” when Books-a-Million's share price soared 1,000% in a week.

The ride all the way back down clarified the appropriateness of buying a stock merely because it had updated its website—considered a big deal in 1998—or more likely because everyone else was buying it.

As Professor Meir Statman said in these pages in an interview three years ago:

“Clients are their own worst enemies. They come to advisors to tell them when to buy and when to sell, and what to buy and what to sell. But that's not what advisors can do—period. Advisors cannot beat the market. But they can prevent clients from doing really stupid things.”

Indeed, Statman's research has indicated that advisors can earn their keep just by preventing their clients from self-destructing in bear markets.

Doing so requires leadership, and a pithy quote I encountered from David Ben-Gurion, Israel's first prime minister, describes the task in terms quite apt for advisors: “there is all the difference between giving people what they want and teaching them what to want,” he stated both eloquently and elegantly.

And while back to school season is upon us, Rudyard Kipling's classic poem “If” also well describes the challenge that advisors may soon be facing:

“If you can keep your head when all about you are losing theirs and blaming it on you,” the British poet postulated over 100 years ago.

And a concluding thought from cultural anthropologist Margaret Mead that has probably never been applied to advisors, but certainly should be if advisors can guide their clients through the gyrations of the next stock market crisis:

“Never doubt that a small group of thoughtful, committed citizens can change the world. Indeed, it is the only thing that ever has.”

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