Column: A recipe for confidence in volatile times

Imagine a face that is calm, free of care. Then imagine a face that is blissfully ignorant, not knowing and not wanting to know for fear of losing that bliss. Then imagine a face that is confident, grounded in understanding of self and the world around it. Those three faces could be interchangeable. They could also represent the recent range of investor feelings.

One year ago, the collective mood of investors could be described much the way the stock market could:  calm, or in some cases, indifferent. There was no panic heading into 2018, no sense of foreboding. 2017 was a record year for positive returns and low volatility. It had been 10 years since the last down year for U.S. stocks and the fear of the last financial crisis was exerting less pull on our emotions.  

For those who were paying attention to the markets and economy, the news was generally positive. For those who did not care to be watching, their indifference mirrored that of the stock market. For many months, bad news did not faze the bull market and one could be forgiven for thinking that attention was not needed. Looking at the faces, one was left to guess whether someone was calm, indifferent or confident.

Change overdue

After a positive start to 2018, markets turned sour. By the end, we had the first negative year for the stock market in a decade. Only two assets, (cash and bonds, barely) finished the year positive, while every other asset class gave back any gains they may have had. After an extraordinary year when everything was up, we had another extraordinary year when the polar opposite was nearly true. If it felt unusual, it is because it was.

A correction of 10 percent to 20 percent was long overdue, though certainly not welcome. It did serve a purpose, though, to focus investors’ minds on the reality that success in the financial markets is not easy. It takes discipline to not chase cryptocurrency at the highs of bitcoin, or to not sell out of the Nasdaq on the Christmas Eve lows.

At the mid-point of 2018, bonds were negative and stocks were solidly positive, but the latter part of the year reminded us that situations can change on a dime. Investors could have been tempted to bail on their fixed income strategies in favor of chasing stock-market returns. But, as Warren Buffett has said, “Only when the tide goes out do you find out who was swimming naked.” So true of last year.

How, then, do we characterize the journeys of calm, indifferent and confident investors over the last 12 months?

The calm investors had an investment strategy that seemed to be working over the years. Steady up-trends and low volatility were signs that not only was the portfolio sound, but there wasn’t much need for a financial plan. Growth cures all ills. In the fourth quarter, these investors were jolted by the speed with which the global stock market corrected. Economic data still looked good, but shares were selling without relief. They turned to financial media, whose screaming headlines only added to confusion. Their calm visage was replaced by worry and questions: “Is there something I should be doing right now? What are the risks unique to me? Is there something wrong with my strategy or my investments?” Unfortunately, without the plan in place prior, it is hard to know the answer to these questions.

The indifferent investors had been less organized than our calm investors. They had not paid attention to their multiple accounts in multiple places. They had not developed a coherent investment plan, let alone a financial plan, but there was no danger in the economy and no rush to solve a problem that did not exist. When October happened, then November, then December, these investors were faced with an epiphany: It has been a long time since any of this last occurred. In that time, they have grown older, closer to retirement and developed a more complex financial picture. The stakes are higher now and reality is this: “I don’t know what I own or where it all is, I don’t have a plan, and I don’t know where to turn.”

Fresh worries

The confident investors were not worrying any less — it was hard not to. But their concern was that this time was different, or that there was something systemic that could pull the economy into recession or worse. The difference with the confident crowd was that they had systems in place that helped them to see these worries as passing clouds, not a furious gale. They knew ways to monitor their risk, evaluate what they owned and digest information in an orderly way. They had thought through their priorities, their reasons for investing, and understood that one month or even one quarter of turmoil probably did not matter in the long term. They also had a support system and accountability partners in the form of trusted resources, guiding principles or a strong advisory relationship. They had made the investment in confidence and it paid dividends when the inevitable worries arrived. They trusted that they had done the good work.

Wealth becomes purposeful for all of us at some point. The moments that are under our control are when we decide to retire, or commit to a new career or start a family. Other moments are out of our control, like losing a job or a collapse in the markets. Maybe some have found clarity in recent months and committed to making meaningful progress toward understanding their family’s finances. Our view is that the perfect outcome for any investor, by whatever means they can achieve it, is confidence. No amount of performance or financial magic can replace the confident feeling that you are prepared for what may come. It takes work, but it is the only outcome worth working for.

Dennis Morton is founder and principal of Morton Brown Family Wealth, a wealth management firm in Allentown. He can be reached at dmorton@mortonbrownfw.com.

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