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December 01, 2008 at 02:00 AM
In 1973, when Henry Kissinger was secretary of state, he said: “Next week there can’t be any crisis. My schedule is already full.”
The time to begin planning for the next financial crisis is after the last one, and before the next one. Like it or not, you are the first responder to a financial crisis.
Your first-responder counterparts in the emergency services departments of your city do have a plan. When fire, hurricane, flood, earthquake or a terrorist strike, they know what to do.
Sadly, when the financial firestorm hit, from the president to the administration to Congress down to many financial advisors in the trenches, there was no plan. There was thrashing around, bills passed that no one read and millions of people froze in the headlights. So let’s get a plan for next time. Be ready.
Our own plan goes back to about 1998 when a sudden drop in the market caused clients (and many of their advisors) to freak out. Panic seemed like a bad thing. So I created the first of what I later called a “handholding letter.”
That first financial crisis plan was simple: “Here’s a letter. It puts things in perspective. Send it out.”
Between 1998 and 9/11, we had several opportunities to improve our crisis management strategy. When 9/11 struck, all of our systems were in place. Within an hour we posted a now-famous letter, “Terrorist Attacks,” which was sent to me by a client from Canada, Bob Cable. By that afternoon, thousands of letters, faxes and e-mails were out the door urging people, “Don’t panic. When the market reopens in a week, we’re not selling.”
Creating a Crisis PlanThe basic steps required are:o Predict what can happen.o Have a plan. o Educate your clients before it happens.o Execute the plan when the sirens go off.o Review and improve the plan.
You must predict what can happen. A very wise friend of mine once told me “Bill, the name of the game is not to predict the future. The name of the game is to predict which of several possible futures can occur and cover yourself on all of them.”
Besides dealing with one panic, you need a plan for the next one. You also need plans for other “futures” you predict. For instance, it would probably be a good idea to have an investment plan to deal with increased inflation following unprecedented worldwide government spending.
For each plan, you need a message. As the politicians put it, you need to “stay on message.”
The handholding messages I produce are based on research done at Dalbar, undoubtedly the top market research firm in financial services. Each year since 1984, Dalbar has produced a study called “Quantitative Analysis of Investor Behavior” (QAIB).
To quote from the 2008 study: “Investment return is far more dependent on investor behavior than on fund performance.” And from a presentation Dalbar prepared a couple of years ago: “QIAB shows that a huge value that advisors add is preventing investors from making wrong decisions in the future.”
What are those wrong decisions? Buying high and selling low.
We stay on message by reiterating: When you panic, you are selling low after buying high.
