There’s smoke in the air, and every breath you take causes you to cough. There’s a dry crackling sound, lights are flashing, an alarm is blaring, and rain is coming out of the ceiling. Panic sets in. Where is the exit? Who else is with me? Was with me? Are they okay? It’s getting hard to breathe, and you find yourself stumbling for the nearest door. Is that even the safest way to go?
Well, good news. That’s not happening. You’re reading this on your phone at home, or on your computer at your desk at work, or somewhere too interesting and unique to be listed here. The basic image of a fire, the danger, and confusion, sets the stage for the conversation we’re about to have, though. Because while the fire wasn’t real, the fire drill that has just been granted to us over the past week is real. We tested the alarms and sirens, considered our reaction time, and dealt with the stress of a big market shakeup.
This time is different! Maybe. But the markets have kindly tanked over 10% and then since recovered a good bit of that tanking over the past few market days. In short, while the damage in the markets was real, we’ve suddenly been granted a temporary reprieve from that damage. We can have a different conversation later about whether we should prepare for the scheduled recurrence of this event in a little under 90 days. Today, what I want to draw your attention to is how you responded to the fire drill.
Did you start engaging in conversations with your spouse or peers about how the end of financial markets and investment reality as we know it was impending? Did you email me or call a member of my team to ask us if you should do anything? Did you forward articles or videos from talking heads warning that this was the financial end of times and everyone had better jump overboard before it was too late? Did you sleep well or poorly? Did you find yourself in a buying mood or a selling mood?
You see, it’s a funny thing. Every client of our firm, and most clients of most other firms, completes a risk tolerance questionnaire when they become a client. The questionnaire asks hypotheticals like: “If you lost 10% of your portfolio in a week, what would you do?” It then has helpful multiple choice options like: “A) Sell everything. B) Sell some of my investments. C) I’d be concerned but wouldn’t do anything. D) Buy more.” And everyone answers in accordance with what they think they’d do in that event. Fair enough. But reality provides us an opportunity to observe “revealed preferences,” or those things we actually think and do when it’s real and not hypothetical.
So, bottom line: Did you flinch? It’s okay if you did. It’s okay to say yes to any of the questions above. There’s nothing wrong with talking to your spouse or asking us what we think (we’re probably your financial planners, what good are we for if you can’t ask us?) It’s okay to get more interested in the news or to share an expert’s commentary on a scary market event. But those things represent flinching in the sense that, when your portfolio was built, you were supposedly picking a set of investments that would make you money in good times and that you could live with in bad times. To think otherwise is to engage in that most dreadfully foolish activity, market timing, where anyone doing it is fantasizing that they can predict the complex movements of the market well enough to jump in when the getting’s good and jump out before the bad times come, and figure out when to jump back in just as things hit the bottom. Herein lies the fantasy of working crystal balls and a Broncos team that can avoid losing a game to a 4th quarter field goal by the opposing team every other game they play.
So here’s the deal: You get a mulligan. The fire drill happened. Some people were calm and collected, others flinched. It’s okay regardless of which one you are. If you were calm and collected, well done, keep it up. If you flinched, now that the drill is over for the time being, do you want to adjust your strategy going forward? Was the loss you suffered during the sudden downturn more than you could tolerate? If so, the good news is that you have a mulligan. We can go ahead and de-risk from where you are with nominal impact from doing so; and if you’re in the crowd that didn’t flinch, that’s great, we can do the same if you’d like, or we can plan to weather the next storm just as well.
A mulligan is a rare thing. Normally, market losses are fast to occur and slow to recover. We’ve been given a rare occurrence where the losses happened fast and the recovery, generally speaking, has been almost as fast. We know that there will be another rapid drop or loss at some point in the future; maybe when the 90-day delay is over. Maybe sooner for some other reason. Maybe later for another unforeseen reason. But now is the time to be honest with yourself. “Did I handle that as well as I could have?” If the answer is no, then let’s take some time in the near future to talk about it.