An interesting thing happened last week when the Dow Jones Industrial Average declined over 5% in a two-day period. Rather than being surprised, or alarmed, people in our little corner of the world, including many clients, seemed to respond with something more like acceptance or resignation. It’s as if it was merely a confirmation of what they had been expecting for some time.
One well known market pundit even tweeted out something along the lines of “the correction everyone saw coming (in hindsight).” A bit tongue in cheek, but the message was still striking. After eight years of the current bull market, people are expecting a downturn of some sort.
At first, I though that was probably a good thing. Maybe it just means we advisors have done a good job of prepping our clients for an inevitable correction or recession that will surely come at some point, or perhaps has already even started. We have always thought it important to keep our clients educated on the potential downside risks to their investment portfolios, and what kinds of short-term negative returns they should be prepared to weather. And for the past seven years we have been readying our clients for the next downturn, by showing them what past corrections have looked like.
Having witnessed, and coached clients through, the last two significant recessions – the bursting of the tech bubble in 2000, and the Great Recession of 2008-09 – we understand how difficult it can be for clients to stay the course when the financial media gets whipped in to a frenzy, so we have always considered it solid financial advising to keep clients prepped for those events, especially as the time grows between them, and we tend to forget what that feels like.
But the more I thought about it, the more something started to bother me about the fact that so many people were basically waiting with anticipation for the bad news to arrive. It took me a few days of not being able to shake off this uneasy feeling before I realized what was vexing me.
If we know that when the downturn does come, folks will be feeling nervous and anxious about their financial situation, and now, it seems, we also know that they have been feeling the same way while in the midst of the longest bull market in history, then when do they get to feel confident and optimistic?
As financial advisors, one of our main objectives with our clients, is to try to alleviate some of the burden and associated stress of managing and monitoring their finances, so that they may more fully enjoy their lives and other pursuits. So if they are still feeling the pressure of potential down markets, even as we enjoy some of the best of times (market times, that is), what can we as advisors do to try to relieve some of that pressure? Certainly, avoiding conversations, or failing to educate clients about downside risks is not the answer, but the question on my mind lately is: how do we balance the necessary client education of and preparation for, inevitable downside risks, while sustaining investors’ confidence and optimism in their long-term plans, so that they can shed the burden and stress of those risks?
Being of Italian decent, and having been lucky enough to spend as much time as I have travelling in Italy, I am quite familiar with the idea of la dolce vita. La dolce vita directly translates to “the sweet life,” though many Americans think of it as “the good life”. It is also the title of a legendary Fellini movie, but that is a discussion for another day. In any case, most people associate la dolce vita with living life to the fullest, or enjoying life by living in the moment. We think of Italian customs like long leisurely lunches, afternoon spritz cocktails with appetizers, or the evening passeggiatta – a drowsy walk through the square after dinner – as examples. But these are really American interpretations. While Italians certainly do love those customs, my experience suggests that, they are much less interested in the so-called “sweet life” than they are in the balance between bitter and sweet in life. The yin and the yang, as it were, and how one side enhances the other. Or, more to the point, how one cannot exist without the other. Italians are obsessed with that balance, and it is evident in almost every aspect of their day-to-day lives, including, of course, in their food. Almost any proper Italian meal will consist of something bitter and something sweet. Agrodolce, or bitter sweet, is a common sauce and condiment used in all manner of Italian dishes, and even in the aforementioned spritz cocktail that is so beloved as an aperitivo, where the interplay between bitter and sweet is the main attraction.
I think that concept can be informative to investing. The truth is that, despite the consternation caused by corrections or recessions, markets cannot function without them. They are the bitter that makes the sweet taste so sweet. It’s not easy to stay the course when markets are falling and the media frenzy gets kicked into high gear. If it were, everyone would do it, and achieving positive investment returns would be a snap. But those moments are what separate successful investors from those who fail. They reset the metrics of markets that get over-heated or out of whack, shake out the chaff, and provide the balance that is needed to make markets work. Fear and greed are powerful motivators, and panic and euphoria are the enemies of investing. That’s when mistakes are most often made.
In the end, I think the answer isn’t to avoid thinking about the downside risks of investing, but rather to embrace them, the way Italians embrace the bitterness of life. If we can do that, then the volatility becomes just another part of the journey, and one that actually contributes to, rather than detracts from, the sweetness of life, and hopefully a more secure financial future.