There is an amusing chart from Avantis Investors floating around the financial planner ecosystem at the moment that sums up the trendlines of 2023 by pointing out the various bits of news throughout the year that might send any given investor into a tizzy of delight or give them a reason to panic. All the while, the chart highlights new high after new high after new high, reaching a crescendo at the end of the year as the S&P 500 index reaches new all-time highs. The paradoxical contrast of the chart, of course, is that this time last year, we’d just come off of 2022, in which month after month, the numbers on the news reports were red, and the numbers on our account statements always seemed to have a negative sign in front of them. Of course, who then could be blamed for taking a skeptical eye at the markets for the past two years?
“Dan, sure, we’re back to all-time highs, but we lost two years along the way.” You might say. And true enough. We faced monthly notes of panic from one client and had a fair number of those same skeptical conversations all the way down in 2022, along with even some shakier personalities during the shorter-term dips in 2023. Yet, to a man and woman, not a single client sold out of the markets and went running for the hills. Why call this an accomplishment? As the chart clearly shows, we are “no better” than we were two years ago. Simple: Because the cost of having abandoned ship at any point between the first of 2022 and the New Year’s Eve of 2023 would have cost the respective “runner” as much as a quarter of their life savings. Yet, by simple merit of staying in the seat, no loss was suffered, and in fact, some gains were made.
Making Gains in a Downturn
We’ve talked before about some of the strategies for taking advantage of a downturn, but they bear repeating. First and foremost, activities such as tax loss harvesting are difficult to complete when the market is going up and up. Another related option is rebalancing, which tends to moderate risk and slow growth on the upside while helping hedge downside risk and capturing variation in returns when the market drops. Yet 2022 was a rare beast, in that not only did equities drop, but the fixed income market dropped as well, with increases in the Federal Reserve rate causing a drop in the value of fixed income securities. While we effectively managed to time evasion of the latter event by pivoting to ultra-short-term bond holdings, we still saw even those slip in value (if only slightly) throughout 2022, only to have a very slow-paced recovery in 2023 that hasn’t kept pace with the more rapid drop and return of the equities market.
Yet, more so than the simple technical and literal value of capturing assets by pivoting back and forth during a downturn also comes a great value for those still saving. Are you a little bit behind on getting your 401(k) started before 2022? Not a problem, you got a whole year to catch up. Planning to retire in the next couple of years? Terrific, not only did you get to do some last minute retirement savings at a discount, you also have some more statistical comfort that the market is unlikely to drop out rapidly underneath you in quick successive years. And if you timed your retirement perfectly for the start of 2023? You’re off to a hot double-digit start to your retirement returns. Take that sequence of returns risk! Yet, despite all the reasons to enjoy a downturn when it happens (despite the occasional stressful headline or maniac shouting on television), we must still use our reason not to panic.
Human Capital in a Downturn
In a decade of conversations with both clients and potential clients, no one has ever come to me as a financial planner and said: “You know, I freak out when the market is bad, so really what I’m doing is hiring you to take care of my money so I don’t make a mistake.” Nor has anyone I know ever checked the box on a risk tolerance questionnaire that asks, “If the market dropped by 10%, I’d sell everything.” Yet, study after study (1 2 3 4 5) emphasizes that the greatest value a financial planner can offer their clients, bar none, is behavioral. Staying in the seat when the road gets bumpy, weathering storms with fortitude and grit, and calming nerves when we feel jumpy.
Yet, the client’s perception of this value is often backward. “The markets can yield 10%, so I will get 10%; my advisor is going to help me get another 5%!” says one study of client’s beliefs. Yet the truth is inverted. “The markets are yielding 10%, but without my advisor, I’m going to get 5%. My advisor can help me get the 10% of the markets (minus costs.)” The human capital a financial planner in this sort of environment provides isn’t simply building an efficient portfolio and managing it through the storm but managing the concerns of the portfolio’s owner. All too often, the oversimplified comment is that any investor can get the return of any investment product, and that is absolutely true at face value. It simply ignores the ever-present human nature that tells us to run at signs of trouble, which have steadily robbed investors of returns year after year.
Yield Not to Temptation
There will always be a scary headline or a shiny new opportunity. Without fail, we want to avoid pain and capture the upside. While the expression says that there are no free lunches, the free lunches in financial planning and investment management typically come with a long line. Be patient, stay the course, and take the low-risk opportunities such as saving and tax loss harvesting during a downturn. And, when markets get good and we get greedy, remember that a downturn inevitably follows the upturn. Plot your own course through the middle of both, and resist the temptation to find a reason to panic or to deviate from your plan out of fear of missing out on the latest and greatest.