Like many of you, I have regular contact with my clients. This January my clients Mark and Michelle came into my office for a review. We noted as we reviewed their financial information that one of their accounts had exceeded $1 million. We had fun with that, even though it is not quite time for them to retire. There was a little bit of backslapping and credit being taken by them and by myself.
Fast-forward two months later. In March of this year, I got a call from Mark. He said, “Hey, we’re just about ready to leave on spring break.” His daughter had won a trip to Florida from a radio station, and they decided to go with her. He went, “I noted that my account value was $680,000. What’s our plan for that?” I know many of you have been in this situation, and it can be uncomfortable, particularly since just 60 days before that we were rejoicing a bit on the account balance having been at $1 million. I know this client very well, and I told him at the time, and I had told him before, “Mark, you’ve got to click on the high beams. We’re going to look further down the road than just this event, but we’ll get together when you get back. Have a great, safe time at spring break, and we’ll talk later.”
Of course, we are in the business of managing money, but what we really manage is our clients’ expectations. In fact, we mold economics with psychology, which is called “behavioral economics,” a phrase that was coined by Adam Smith. I think he wrote his first book in 1759. Mr. Smith is the father of modern financial theory. And he’s right that our clients will see a free fall in the market and get jittery. It’s human nature to retract from that which you believe is harming you. Hand on a hot stove comes right off. Money goes down 30 percent; they to head to the hills.
We have to intervene in that process. Clients will sometimes mistake temporary market declines for permanent losses, and they’ll take action to make it so. So, we must intervene in that process on behalf of our clients’ best interests. And we meet fear with fact.
What happens if we miss the 10 best days or we miss the 20 best days of that market? Clients try to fetter it all out. “I don’t want that bad day; just give me the good days.” Everyone wants to go to heaven, and nobody wants to die, right? So, what happens if we take out those 10 days, half the return? We take out the 20 best days, one-fourth the return for the client. And no better chart to show that you have to be in it to win it. You can’t do it when you’re not in the market. And so, for those core assets our client has dedicated to equities, that needs to be very sticky for them.
What happened in February and March of 2020? We saw deterioration in the marketplace around the second week of February and by March 23, in that six-week period, the market went down 32.31 percent. The Dow Jones, Toronto Stock Exchange ― no one was immune. North America got hit; the world got hit with that dip, that coronavirus dip. Now, we all know that it has since come back, as they mostly do.
People say we haven’t been through this before. We have been through it before. In 1918, there was the Spanish flu epidemic, which really wasn’t from Spain at all. In fact, epidemiologists tell us that it started in Fort Riley, Kansas, and that during World War I, those soldiers who were being trained got shipped out to Europe, all over the world actually. And that also inspired a deepening of the pandemic worldwide.
So, it has happened before. We can take a look at how the market behaved during that period of time. What happened after? What can we expect? When my client Mark asks, “What is our plan for that?” my response is “Click on the high beams. Look further down the road, and these become small problems.” So, what happened in 1918? In that year, between June and December, six months, the market went down 33.47 percent. It was within a point and a half of the drop we just experienced in 2020. Uncanny that it would be that close to the drop that was experienced 100 years earlier.
What more can we glean from that? Well, we know what happened in the aftermath. In fact, that fall the virus came back with a vengeance and even more people died ― 50,000 deaths from the Spanish flu in Canada, which at the time had a population of 8 million. There were about 110 million people in the United States at that time; upwards of half a million people perished. This was not positive news; they didn’t know what was causing it. They thought that perhaps Germany had something to do with it, our foes in the war, in World War I. There was no medication that could help these people.
And so, there were a lot of differences, but we are looking at the similarities. The recovery went into a sawtooth pattern but then shot off to new highs and went up before the end of the following year — over 40 percent. I think that from trough to peak, our gain has been about that too. So, we are reliving it. Although it’s compressed, what took six months then, took six weeks today. We really are on a much different timeline with a similar problem.
Some clients have time constraints. They don’t have 25 years. So, that has to come into play when you speak to clients; maybe they’ve got too much allocated toward equities. They need to take some off the table. As people get older, they tend to do that, and it’s wise advice. So, remember, client discomfort does not come from great long-term averages. Client discomfort comes from volatility that happens every so often. And so, if you train them for that, and they expect it, when they call you, they’ll say, “Gee, this is just what we thought was going to happen.” That’s what you want them to say.
Richard Dobson Jr., CFP, from Cedar Falls, Iowa, is an 18-year MDRT member with one Court of the Table qualification.
