How to Survive the Crash
There's an elephant in the room, and it's getting fatter and more awkward
October 15th, 2018
Let's prepare for The Inevitable. One of the quirks of human nature is that upbeat investment books offering strategies to make money are routinely outsold by doomsday titles like "How to Survive the Coming Stock Market Crash."
For most people, the fear of losing money outweighs the risk of making money — meaning that too often clients invest because they do not perceive their investment as "risky." A bull market lasting 115 months can make a believer out of the toughest skeptic, so we have work to do.
Crashes happen, but memories fade — or don't exist in the first place. To help prepare yourself, your practice and your clients, let's start by addressing the new players — those advisers and clients who have not experienced the pain of a market crack.
Yes, stocks fell by more than half in the financial crisis of 2007-2009, but that began 11 years ago. Forty-year-old advisers were only 29 and clients on the cusp of retirement were in their mid-fifties with a lot of runway to go. Perspectives change with circumstances.
My generation learned about market crashes in 1987 — stocks down 22% in one day — and in 2000-01, when the tech wreck erased $5 trillion of hyped dot.coms and then got clubbed again on 9/11. Painful lessons.
One of the most poignant memories I have is an emotional call in October 1987 from a client who had inherited her entire investment account and hadn't been an investor before 1985. "What will happen to me?" she asked through her tears, before I assured her that she was still in the black, diversified beyond stocks and with a long way to go before she would need the money. It's tough to get people to hang in there and the benefits go to the investors able to be tough.
What if you don't have time? The second dimension of market crashes is that they can be triggers for investors who have been wounded before — and bounced back — but now fear they lack the time to recover.
Baby boomers rule the advice industry and their median age of 63 provides perspective about their perspective. People who are 63 today were 45 at the time of dot.com bubble, and a mature 52 when Lehman went bust. Who could blame the pre-retiree for fearing the future after seeing stocks fall by half — twice?
That's a devastating blow to a retirement account and an unacceptable loss for most investors – if they thought it was happening again. There is certainly a scenario in which a stampede of fear crushes stocks if the boomers run. No wonder consumer-focused companies like Vanguard have been communicating their concerns about lofty markets to their investor base.
A Really Big Elephant
The real risk this time around is the scale of investor participation. There are simply many, many more investors in the markets, spread across an array of products.
ETFs were nowhere in 2007 and now represent more than a third of market trading volume by value. New, younger investors across generations have been actively courted by robo-firms, the number of RIAs has skyrocketed and big platform players like Fidelity and Schwab have more than doubled in size. This isn't an elephant, this is a herd!
The sobering statistic is that most investors do better when they work with advisers across a market cycle. But fewer than 20% of investors have regular communication with a financial adviser. Fewer still can say their adviser knows them well enough to know their concerns.
Complicating the scale is its diversity. Most advice clients have two to three advisers and work with five to six different platforms or product providers – there's no "primary" adviser working proactively to help and to adjust for risk tolerance. Most investors are really on their own.
Before you reach for the keyboard to slam my negativity, consider the upside. The maiden voyage of the Titanic was a historic moment for all passengers, but a significantly better experience if you found a seat on one of the lifeboats. More climbers die on Mount Everest while heading back down — after planting their flag — than on the ascent. There are huge benefits to preparation.
Confront the Elephant
You've been in this room before of course, but clients may not know — or didn't know you then. Or they forgot. First describe the elephant — reference the market crashes that began in 2000 and 2007.
Jog those client memories and ask, "What if?" It is very important to begin the conversation knowing where it will lead and what strategies you have to recommend for action now — and not falling into the trap of market timing or performing some miraculous trick with options and short sales. I will leave those ideas to folks much smarter than me. Here we want to establish the professionalism of being a wealth adviser and the fact that there is a path forward.
Remember that market losses are just numbers on a statement until clients realize what those numbers and values mean for their life. More value allows them to consider retirement sooner while falling numbers can mean they have to keep working.
So the best advisers learn to keep the lifestyle plans in front of their clients at all times. What expenses are we looking to fund with investible assets? What happens if those values change? And what can we do now? How will you use that investment account to fund your future?
If you crash your car, you can fix your car — or you can get a new car, maybe a better car. Think about what a "retirement account" has to fund for most clients. They worry about health care costs, remaining independent and perhaps leaving some cash for the kids.
One approach is to bundle the objectives, set aside $1 million if you can and invest in the markets. A lot of investors hope to earn 8%-10% per year, and over the potential 20-plus years of typical baby boomer life expectancy, that should work out OK. But as I said last month, life happens, and maybe the elephant starts banging around and the plan takes a hit.
Even with fewer assets, there is potential to hit the original objectives by using the leverage of other vehicles. For example, a single premium long-term-care policy could buy multiples of the premium in long-term health care costs. An annuity could be structured to begin paying at age 80 when other investments have been drawn down. And a life policy could boost the value of savings the client earmarked for heirs or charities. And of course they can take advantage of these products before the market falls, not just afterwards.
Ride the Elephant
One great advantage of talking about risks like a market crash is that it opens the door to a broader discussion of where else your client is vulnerable. This is a great time to help clients take action on my favorite overlooked area — health care.
Hard-core investors love to talk stocks but hate to consider the day when they won't be making good decisions and have to stop. What's the plan then? Do they have a power of attorney or proxies? Most clients haven't considered the big transitions of aging, such as financial decision-making, living arrangements, health care and driving.
Of course they aren't easy topics, but while you are talking about the "elephant" of a lofty market, you could make some progress on real-life issues that are even more certain than a drop in stock prices.
The Biggest Elephant of All
The runaway No. 1 added value of a financial adviser is the ability to change behavior. Helping clients make better decisions means confronting the elephants in their lives, taming them and putting them to work on behalf of a better future.
But to change behavior you have to engage with clients. So look back up this column to see the real opportunity — most clients are not being counseled by a professional. Most don't get the coaching essential to have perspective and fortitude in tough markets, to stay the course with the appropriate percentage of assets and to consider alternative strategies designed to help them achieve their objectives.
No matter what the market is doing, this is where advisers shine and robos fade. When the going gets tough, the tough get personal. If you can help clients confront the elephant you will win those not-held assets and a stream of referrals. After all, if you're going to engage that elephant, you'd better have a plan for where you want it to go.