I want to share with you a story, a recent story, a story of when I failed.
Back in March of 2020, I was on the phone with a client. She is in her late 60s, successful in her work, a great person whom I appreciate, and also one of those people who get super nervous any time the market fluctuates. When things move, as they have so often during the pandemic, after a few days of fluctuation the market movement usually gets picked up by the media. As soon as you hear about it in the news, this client is one among a small handful of people whom I know to expect a call from as soon as there’s volatility in the markets.
I think as a firm we have been quite successful at bringing clients on board, educating them on what we do and how we do it, such that the vast majority of our clients don't blink when markets start moving. Obviously, when we go through something like what we went through in 2020, it causes more concern. This one client, in particular, is a person who needs a personal touch in times like these. Ordinarily, I've been able to bring her back down to Earth when she proposes her solution to the issue, which is "Why don't we just go to cash for a while?"
This time, I failed.
Let’s take a trip back to the middle of March 2020. Remember, the pandemic had caused almost a global economic shutdown. This client’s stress level was hitting a high. She felt like she was losing her mind.
What could I do? I did what I do with anxious clients, which is to go into a calm, consistent mode where I try to put things into perspective, reminding them somewhat tactfully that we've had this conversation before, and that this time is no different. I remind her that we have done planning together. We've talked about the numbers. I reminded her we had sufficient cash for 18 months to 24 months' worth of expenses, which essentially means that we could stay invested for at least this period of time. I also told her that this kind of event will happen now and in the future. I don’t mean the pandemic necessarily; I mean erratic market movements. This is not a one-time thing.
In terms of percentages, declines of the kinds we have seen this year are actually very normal. Every six or seven years, on average, we see a decline of about 33-34% in the markets. Again, staying with averages, that decline lasts about 14 months. I've articulated this historical fact to this particular client a number of times. In fact, we talk about it with all of our clients, at least initially.
To use her own words, “But this time, it was different.” She was really rattled, and through multiple conversations that week, I did what I could to bring her back down to Earth. I was standing at my desk at home, being in turns compassionate, then passionate. “Look, I know it’s scary out there,” I said. And then, I would add, “This is the wrong move, though, this is not what you should be doing now.” To no avail. I pleaded, I encouraged, I tried everything (but clearly not everything), because ultimately, I failed. I knew it the moment she said “Ben, I understand. I know you’re right, but I just can’t sit with it. It really is different this time.” And then she went to cash….
I was sick about it. That same week, I had conversations with probably 25 or 30 other clients. And 25 to 30 times, I turned it around. I succeeded in preventing them from moving to cash. It’s normal, when the markets are down 30 or 35% in the scope of a couple of weeks, that any human being is going to be rattled. If they weren’t, they just wouldn’t be human. Jim had conversations with just about the same number of clients, and he, too, prevented those people from leaving. We were able to keep everybody invested, and to keep things in perspective in that respect with were successful. But with this one client, I couldn’t make it happen.
Looking back now, at the end of January 2021, not only do we have hindsight, but we have actual returns in hand to compare the path she took, versus the one we advised her to take. This client got out of the market in March 2020 when she just couldn't handle it anymore. Usually, people tend to get out somewhere close to the bottom of the dip, and in this case, it was no different. As the market started to recover throughout the year, she still wouldn’t get back in. First it was “…the elections are coming up and that’s going to create havoc..” I failed to get her to re-enter into her positions. Then the elections were behind us, and now she was worried about the inauguration. No use. She was not getting back in.
As we compare her returns to those of our other clients, the difference is jarring. Her one-year return is around negative six percent. Our other clients are in their mid-twenties, meaning their accounts are up twenty percent or so. They all essentially have the same portfolio. Why the difference? Every single one of those accounts went through the same decline, but she is the only person who didn’t stay in to experience the recovery. She’s ok with all of it. She accepts it and has some way of rationalizing it for herself.
This incident has stayed with me though. I can’t get it out of my mind. Collectively, between me and Jim, we had direct conversations by phone or on Zoom with around 60 clients during that time. We were able to calm their fears and execute our role. There were countless others that we indirectly encouraged to stay invested through the regular webinars we offered during that period – all of which were heavily attended. We got back to positive territory in people’s portfolios, I think it was in July or August of 2020. How many folks had the same thoughts as this particular client? They too were freaked out, they too wanted to move to cash, but they didn’t because of the education and support we provided through webinars and other conversations.
While the strategy and our investment discipline remain without a doubt the foundation of what we do, we serve a far more important role for our clients. Just getting people to understand that they need to be invested solely and completely in equities is paramount to our strategy. Only with the premium that equities provide are our clients able to actually capture the long-term benefit of the markets. Staying fully invested in equities has historically yielded around 10% in returns before inflation, whereas high-quality bonds yield a fraction of that, closer to 3-4% overtime before inflation.
Naturally, we hold that you need to be completely invested in equities. We take it a step further, because being invested in the S&P 500, for example, is pretty commonplace. The extra step we take is to get people in front of companies, a smaller handful of companies, through a disciplined process of decision-making, top-level research, and the understanding that with patience we have experienced better results than what the broader equity markets have provided. Now there are no guarantees, like anything else in life, but there is an opportunity. And if you believe in opportunity and you have discipline, then I think that you can do very, very well.
How do you quantify your value as an advisor? If you want to bring it down to fees, for this client that “got away,” what was our fee? What's the benefit of the value that we provide?
Well, had she stayed invested, she would have realized a positive return of somewhere in the mid-20s for 2020. She didn't follow our advice, and she ended with a return of about negative six percent. You could make a very strong argument that our fee is worth around 30% for 2020. Because she didn't follow our advice, and it cost her 30% of her account.
While this may seem like an extreme example, it does illustrate that our value should never ever be quantified by some comparison of what we're doing versus the S&P 500. Instead, the focus should be on the value of our advice in terms of helping our clients from self-sabotaging behavior. This is why we insist that clients have a plan in place. This is why we have an investment policy. This is why we come to an agreement with our clients with regard to “These are the rules we (all) live by.” You simply can't ignore that historically the equity markets, despite all of the very, very tough times they’ve gone through, have averaged what they've averaged. And it's been a significant premium over that of other asset classes: bonds, cash, and even real estate. I have no idea what the premium of staying in equities will be like in 10 or 20 years from today, but I do know that if we stick to our plan, it will help us move toward our goals, as opposed to the other direction.
What is the lesson or inspiration here for me? I take it really personally that I failed with this client. Sure, I can make an excuse and say “Well, it’s her money, not mine.” I could say a lot of things to make myself feel better. I let her go to cash, and even when she “came back,” so to speak, she didn’t fully re-invest. She’s not the last of her kind. Clients like this come all the time. Certainly, it reminds me of the importance of sharing with clients that the moment will come, it’s inevitable when they will want to quit. We need to have this conversation not only when we onboard clients, but over and over again, lest they get comfortable and forget.
I pride myself on being pretty blunt with folks. I learned that I need to be even more direct. We routinely work with people who may enter the relationship with say, $250,000, which is real money. But it pales in comparison to 10 years later when they have saved a whole bunch more, and with compounded rates of return they have two or more million in their account, and all of a sudden, they hit a once-every-six-year-bear-market. Now, they’re that much closer to retirement, and they consider this their “real money.” That’s when they say, “But it’s different now.”
Do we add value as advisors by educating them about staying fully invested in equities? Sure. Do we add even more value by having them invested in our strategy? Yes, absolutely. You’re missing the point though, if you don’t see the real value that we provide, and that is by being the gatekeeper between them and their unavoidable path to self-sabotage.
Ben Beck is Managing Partner & Chief Investment Officer at Beck Bode, a deliberately different wealth management firm with a unique view on investing, business and life.