After spending much of the past 30 years collaborating to manage client assets, we would like to think that our shared vision of what matters in the markets today is as valid as it was back in the late 1980’s, following the October 1987 stock market crash.
Mark Twain is credited with having coined the expression “History does not repeat but rhymes.” As we take a look at today’s market conditions and economic backdrop, we do see a kind of “rhyme”: It seems that the timing of a return to more “normal” interest rates and monetary policy has created the uncertain environment that has hung over the equity markets for the last couple of years.
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This long-awaited return to “normal,” along with the microscopic (and on occasion negative) money-market rates, has challenged investors to function effectively during these unusual times. In prior cycles, over the past three decades, handsome returns could be earned by allocating assets to fixed-income or money-market vehicles. Today, with interest rates at, or near, historically low levels, asset-allocation and capital-preservation strategies in the equity component of client portfolios are now more important than ever.
Over the years, we have come to understand what the majority of clients are seeking with their investments. Simply stated, they want to make money when the markets are going up and do not want to lose money when they are going down.
While the industry has done its best to educate investors on the strategy of “stocks for the long run”—and while many of them continue to idolize buy-and-hold, value-oriented champions like Warren Buffett—most investors are not equipped to deal with volatility in the cool-headed way they think they are.
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After a 50 percent decline in a bear market, a 100 percent return is required to simply get back to even.
History is littered with examples of panic-selling at market lows, such as what occurred in the first quarter of 2009, which was followed by a reluctant return to equity markets years later. It is frequently loss aversion rather than risk aversion that drives decision-making among individuals, and even the most sophisticated pension fund trustees. Over the years, we have viewed managing client expectations and emotions as perhaps our most important role in helping clients realize their investment objectives.
Studies such as that published by Boston-based research firm DALBAR (Quantitative Analysis of Investor Behavior) annually compute the actual returns of fund investors versus the returns the funds initially stated.
It is no great surprise that real investors lag those stated returns, with the difference being attributed to poor timing. It is not that making tactical timing decisions is a bad choice, but it is ill advised to be making those choices based on emotion rather than disciplined methodologies.
Our role as advisors is to help provide that disciplined approach that is so vital for long-term success.
Looking back to 2007, consider that Apple was launching the iPhone, Google was launching the Android, and platforms like Twitter and Facebook were just being rolled out.
All of these new sources of information-sharing make it more difficult to manage the emotions of investing, as there is no escape from the daily bombardment of opinion that drives rash decisions. We have found that avoiding draw-downs rather than upside capture is still vital to success. Consider that after a 50 percent decline in a bear market, a 100 percent return is required to simply get back to even.
What’s more, it is often these significant draw-down events that drive investors away from markets, causing them to miss out on the potential rebound that usually takes place. Having a strategy to deal with market volatility is and always has been a central part of our investment discipline and vital to long-term investor success.
Tony Maddalena, Wealth Advisor, and Charles White are with the Wealth Management division of Morgan Stanley in Purchase, New York. The views expressed herein are those of the author and may not necessarily reflect the views of Morgan Stanley Smith Barney LLC, member, SIPC, www.sipc.org. Morgan Stanley Financial Advisors engage Worth to feature this article. Tony may only transact business in states where he is registered or excluded or exempted from registration, http://fa.morganstanley.com/themaddalenagroup. Transacting business, follow-up and individualized responses involving either effecting or attempting to effect transactions in securities, or the rendering of personalized investment advice for compensation, will not be made to persons in states where Tony is not registered or excluded or exempt from registration. The strategies and/or investments referenced may not be suitable for all investors. Morgan Stanley Smith Barney LLC offers insurance products in conjunction with its licensed insurance agency affiliates. CRC1500513 05/16.
This article was originally published in the August/September 2016 issue of Worth.
