By the time you read this article, clients will have their December account statements in hand. Expect calls.
Emotion often overrides logic. We think with our hearts, not our heads. The market is driven by fear and greed. Here are some things advisors don’t obsess about, but clients do.
1. 2019 is the 90th anniversary of what? At some point, someone on TV will helpfully remind listeners that 2019 will be the 90th anniversary of the Crash of 1929. This event led into the Great Depression. Some TV commentators will probably ask different guests: “Could it happen again?” Somehow, someone will give an answer that really scares people.
Thoughts: Things were a lot different then. Contrast how buying on margin worked, then and now.
2. Points matter. Many people watch the Dow Jones industrial average. It was up over 1,000 points one day in December. It was down over 600 points on Jan. 3. Although the percentages are smaller, big numbers scare people.
Thoughts: On Oct. 28, 1929 — Black Monday — the market was down 38.33 points. However, the Dow closed at 260.64, so that was a decline of nearly 13%. The Dow is about 100 times higher today. Oct. 19, 1987, brought the Crash of 1987, when the Dow fell 508 points to 1,738.64. That was a 22.61% decline. Percentage-wise, recent declines are small by comparison.
3. Percentages matter. Fortunately, many investors do think in percentage terms. A 250-point drop represents a 1% move if the Dow was at 25,000. However, clients have been seeing moves of 2% or more in the course of a day. When they think about interest rates they could get on Treasuries, a one-year T-bill yields about 2.60% as of Tuesday. They see the market wiping out wealth in a day that it would take a year to earn in the fixed income market.
Thoughts: The flip side has worked in their favor for years. The market might gain more in a day than fixed income could return in a year. (Rates were lower then.)
4. Guess who hasn’t been saving? Clients have short memories. They think about the great returns they were earning in the stock market for the past eight-plus years. Many probably made the mistake some private or public pension funds might have made, when they neglected to make annual contributions before the Crash of 1987. They rationalized they were ahead of the game. You probably have clients who didn’t make the retirement savings payments you suggested, because their assets were growing faster than projected. When the market declines, they are suddenly far behind.
Thoughts: Discipline yourself to continue saving. If things are going well, remind yourself how much more money you might be making. Maybe you could retire earlier than planned! That’s a good motivator.
5. Paper profits. Suppose your client has a $2 million portfolio, primarily in stocks. Every month the market goes up 1%, their statement shows a $20,000 gain. That’s $240,000 a year! That’s also a 12% annual return, which isn’t sustainable in the real world. However, they told themselves, the good times can last forever. They took on extra debt, buying stuff they really didn’t need. Then reality struck.
Thoughts: Christmas is over. Back to reality. Time to get with the program. Stop spending on silly stuff; start saving again.