Broker Check


February 12, 2020

Every so often I like to revisit an earlier writing and see how well it may have held up over the years. In this case, I went back to December, 2010 almost ten years ago and shortly after the 2008 - 2009 bear market -- which still somewhat dwells in the minds of investors despite the nightly headlines of upwardly trending markets. 


It's not Halloween and I'm sure that the headline didn't really scare you, did it?  Yet, when someone comes up behind us and surprises us with a "boo," we often are surprised and sometimes react with scared apprehension --  even though we know better. Orson Welles earlier proved it to us with his well documented broadcast of War Of The Worlds. The human imagination and our hardwired instinct for survival provides us with the well known "fight or flight" response. This instinct has enabled our species to survive and evolve over the millennia to our present state. As noted investment consultant and author, Charles Ellis has pointed out in numerous interviews, while this may have been a valuable evolutionary trait that enabled us to escape the clutches of the sabre toothed tiger, it is probably the single largest cause of investor failure.

As we have seen, most recently in 2007 - 2008 and early 2009, investors saw significant amounts of their net worth -- if not in it's entirety -- wiped out. Now get this, if nothing else: DECLINES AND VOLATILITY AS RECENTLY EXPERIENCED ARE ENTIRELY TO BE EXPECTED! Volatility has been with us from the inception of markets. It is the price that we pay for equity markets delivering the superior returns that have been received over the decades -- if not centuries. However, most investors never, ever receive these returns and the reason is quite simple. It is not stupidity and to a large extent, it is not even due to the Bernie Madoff's of the word doing their own particular brand of damage.

It is due to the fact that we are human and rather than coldly calculating and thinking matters through based upon logic, history, experience and knowledge, we instinctively react. We "feel" rather than "think!" Our emotions take over our cognitive minds with massive help and inputs from the various and sundry media sources -- running the gamut from the nightly news to the financial  talking heads to the unregulated and unsupervised bloggers on the internet. Moreover, as we have seen time and again, these media mavens also have more than willing co-conspirators from those whom we are supposed to trust and expect unemotional and unbiased guidance from: the financial services industry.

If any of you -- including the regulators who supervise me -- believe that last sentence is over the top, consider the opinion of supposedly knowledgeable "wealthy" investors who were recently surveyed. This was reported in the December 8, 2010 edition of Wealth Advisor: "...Wealthy investors are also divided over whether having a financial advisor actually makes any difference... the largest proportion of wealthy investors, 44% said having an advisor didn't help at all, while 11% said having an advisor hurt them...."

One might ask why and the answer is quite obvious: because the financial incentives are in place for even a well intentioned advisor to either enable or facilitate an investor's understandable and all too human but detrimental behavior. Take yourself back to 2007 - 2008 and early 2009. Economic doom and gloom headlines pervade our country with an able assist from our politicians down in Washington and the media. It has been well documented that legions of investors called or visited their brokers and/or financial planners and told them to sell their stocks and put the money either in money market funds, a CD (both, effectively, earning negative rates of return when taxes and inflation is taken into account) or bonds (even today, the largest flow of funds is into the bond markets). Here's the choice faced by that advisor: do his job, coach and educate those clients and enable them to adhere to their investment plans (made without the heat of the moment) and risk having them leave and take their commissions and/or fees out the door with them or accede to the desires of the moment and enable those clients to act upon their emotions. Even the most well meaning and competent advisor is faced with enormous pressure (even sub-consciously) to enable and facilitate deleterious investor behavior.

Of course, we all know how the story ends, with the clients sitting in cash or worse while the market bottom is reached, in March 2009, and takes off from there. This wouldn't be such a sad story except for the fact that it has been repeated on an ongoing basis. Aided and abetted investors panic and sell out at the worst possible time only to miss the subsequent rebound that is required to be present for in order to secure the long-term positive returns that the equity markets have historically delivered.

Respected industry commentator and author, Nick Murray has pointed out several relevant facts related to the foregoing (with thanks to fellow investor coach, Gene Offredi for providing the quotations):

"Since the end of World War II—that is, during roughly the life span of the people arriving at the threshold
of retirement today—the equity market has provided positive returns very nearly four years out of five.
The other year (actually, the other fifteen months, on average) there’s been a “bear market”—a temporary
decline in equity prices of an average of about 30%. Simple arithmetic will tell you, therefore, that
there’ve been thirteen “bear markets” during these 65 years."
"How have all the investors who’ve lived in America during these momentous two thirds of a century not
succeeded in achieving wealth in equities? I’m convinced it’s because of one fundamental failing: they
got scared out. They failed to see that volatility wasn’t loss, and that the long-term advance of equity
values historically has completely overwhelmed the cyclical declines.
The ability to distinguish between volatility and loss is the first casualty of a bear market. That ability,
then, is almost entirely temperamental, rather than intellectual or analytical. It’s an act of faith that is
sustained not by what you know but by what you believe. And it is a capacity that is literally priceless
"This may be a conversation readers will want to have with their financial advisors, in contemplation of a
long life of potentially superb equity returns punctuated often by genuinely horrific volatility. Because
coaching their clients through those episodes of volatility—helping them not to get scared out—may very
well be the most valuable service advisors have to offer
." (emphasis is mine).

 Copyright (c) 2010, Frederick C. Taylor. All Rights Reserved