Letter to Our Clients - June 2009
Dear Clients and Friends:
Success is a Journey, not a Destination.
We so often create “anchor points” from which our current situation seems to be measured. Such as, “I should weigh the same as I did in high school,” “I should be able to walk/run/lift as much as I could 10 years ago,” “I should be able to get by on ___ hours of sleep,” etc. In our financial lives, we might say to ourselves: “My investment account should be worth what it was worth in October 2007.”“By this age (or this time in my life), I should have a net worth of $______.” These are dangerous conversations to have with ourselves.
Perhaps the portfolio was not really “worth it” then. Was it “worth it” on March 9, 2009 – what may have been the low for this Bear Market? Is it worth today what our print-outs say?
Really, a first question to ask is: “What do I need my money to do?” Next is: “How should it be positioned to do what I want or need it to do?” Then: “How do I measure whether I am on track to meet my goals?”
Coming off the last 18 months especially, but even going back further than that, it has seemed to me that most people are treating the rise and fall of their investment accounts as a way of keeping score. When the accounts are up, we are doing a good job. When the accounts are worth less than they were at their height, then we are not doing a good job. This mentality can lead to some unfortunate decision-making. For example:
1. When stressed, people generally do not make good decisions.
This was obvious when the market was dropping. Many people world-wide sold, or wanted to sell, as the markets dropped, and the pressure was worst in March of this year. Some people even quit adding to their retirement accounts in the first few months of 2009, at exactly the point when they should have been most aggressively adding to their positions.
However, stress shows itself at the other extreme as well. When the markets are rising there is a sense that the train is leaving the station, and we’re missing it! Cramer/my neighbor/my favorite magazine says “Buy XYZ,” and, presto, we must own it! The stress of chasing performance can cause as many bad decisions as selling in the panic downturns.
2. No one, especially the experts, can predict the future – so we should stop trying.
a. My recent favorite on this topic occurred in November, 2007, when Barron’s featured 12 leading Wall Street portfolio managers.12 out of 12 predicted the markets would be higher by the end of 2008 – and most were predicting double-digit increases.We know how that turned out.
b. In March, 2009, sentiment was overwhelming that “this time is different,” that the bottom has not yet occurred, and the markets will stay low for decades. This may prove true, but most likely will not.
c. Also, there has been much written about how “buy and hold” has not worked and should be discarded as an operating philosophy. Personally, I never felt one could buy and then ignore the purchase. Some securities or asset classes are almost always in need of adjustment. However, if the alternative to “buy and hold” is market timing, that, in my opinion, is a more dangerous operating philosophy than what it intends to replace.
d. Experts in the late 1990’s were predicting that an 8% withdrawal rate from your portfolio was prudent in retirement, because the markets “always” make 10% or more. From 2001 through 2007 the advice changed from 8% to 4%. The idea was that you could invest in a mix of stocks, bonds, money markets and alternative investments, and every year or so sell from your profitable investments to support your 4% withdrawal. Surprisingly, the financial services industry has been remarkably silent over the last year about “safe” withdrawal formulas. I have been saying for years that it is my belief the only “safe” withdrawal is the net income from interest and dividends that your accounts can generate, after all expenses have been deducted.
3. As much as possible, we should work to separate our emotions from our financial decision-making – or at least be aware of how much our emotions are influencing our decision-making.
Quoting from the article "Control Yourself" in the Wall Street Journal, June 8, 2009, Page R5, "The field of behavioral finance seeks to explain the set of psychological biases that affect people's investment decisions...[T]hose with a 'recency bias' assume events or patterns of the past will continue into the future." I have seen and heard this from many, many people in recent months. However, there are many other biases built into our systems which affect our decision-making. Many of these are “lessons” learned from negative personal experiences, or from watching and hearing of the traumatic financial events which our parents or grandparents experienced. My grandfather was not willing to buy a house, especially with a mortgage, because of what happened with real estate in the 1930’s. I have been a very reluctant bond buyer because of my experience with the bond markets during the peak inflation and interest-rate years of the late 1970’s and early 1980’s.
We should not ignore these emotional triggers, but we should not let them blind us to financial realities.
Going back to the beginning, if we can see that Success is a Journey, then we need to be very careful about saying we are now at a point in time where we have either succeeded or failed. Thus, I believe we did not succeed in October, 2007, and we did not fail in March, 2009.
Instead, we need to ask ourselves: “What should we do from here?” There is no universal answer. For you, I think it important to be confident that your financial and investment strategies are in place to deal comfortably with a Dow at 6,000 or 10,000.I will say, if the Dow gets over 11,000, we definitely need to talk again!
We remain committed to the mission of helping you use your financial resources most effectively to achieve your life’s goals. It seems to me that one of the most important things we can do is to help you deal with the change that is constant in your financial life. The markets are now about where they were in mid-September, 2008. Please contact me if you would like to discuss this.
Remember, Success is a Journey, not a Destination. Let’s enjoy the journey!
Robert K. Haley, JD, CFP®, AIF®