When he first became a client several years ago he had $400,000 to invest. Over the years, it has grown to more than $1 million. His goal is to leave at least $1 million to his children. Since he is 70 years old, he is concerned that if market volatility continues, his portfolio may be worth less than $1 million when he dies. So he asked us to reduce his exposure to equities from 60% to 20%. This was not a market-timing decision for him, but rather a strategy that he felt would ensure that he would reach his goal. Since he did not need the market to recover for him to reach his goal, we felt that reducing his exposure to equities would provide him with peace of mind and, at the same time, eliminate his daily worries about market declines. Was it the best thing for the portfolio? I have no way of knowing, but in the long run it probably wasn't. Was it the best thing for him, his peace of mind and the attainment of his goal? We believe it was, so we implemented the strategy when he asked us to.
The other call was from a client in an entirely different situation. She is a widow who is taking regular withdrawals from her portfolio, and will be unable to sustain those withdrawals unless she experiences a market recovery. When she called, she told us that she was becoming very frightened that she would lose her life savings. I reminded her that we had already set aside three years of her income needs in cash and short-term CDs and that we were not selling assets during the volatile market, but she was understandably concerned. While we have no idea what the market will do over the short run (I am writing this on October 31, the end of one of the worst months and best weeks in history), we are confident that it certainly will recover one day and that when it does it may do so very quickly. Also, we will not know that it actually has recovered until it will be too late to participate in the rally.
Regardless of how smart many of us think we are, none of us know when to get back into the market if we are not in all the time. For this client to sell at a time when the market was so depressed may have guaranteed that she would have run out of money during her lifetime. As we know, markets turn very quickly and when she asked us to sell her equities (60% of her portfolio), the S&P was down to about 850. On the close of business on October 31, it had reached about 969, an increase of about 14%. Of course, I have no way of knowing what the future holds, though those of you reading this article will have the benefit of knowing what it did for 30 days following October 31. So with the help of her son, who agreed with us that she needed to stay invested, she agreed to "stay the course." This was the strategy she needed to better reach her long-term goals.
As financial life planners, our clients expect us to provide unique solutions for their unique situations. Let's not provide the same cookie-cutter answers for all of our clients, such as "Stay the course," "Put 60% of your money in cash," "Don't worry, everything will be fine." We may be inadvertently telling our clients, who in their minds are experiencing financial emergencies, to dial 911.
Roy Diliberto is chairman and founder of RTD Financial Advisors Inc. in Philadelphia.