Swift: We just passed the bottom of the market of the Great Recession; in fact, we are at the five-year anniversary. What have you learned—and what should we have learned?
Booth: We learned that markets go up and markets go down. Buyers and sellers come together, and markets have to clear on prices that make it attractive for buyers to come in. In a voluntary transaction, both sides of the trade feel like they got a good deal. That’s such a simple lesson, but it's hard to remember when you are in the middle of a big decline. We don’t think investors are coming in and buying stocks so they can lose money. There are forced sellers but not forced buyers; so without forecasting and making a random guess at the time, I did this video in the fall of 2008 saying my guess was that buyers were getting a great deal. It’s also reassuring to clients that, even though the markets dropped a lot, something of this magnitude happens once a generation.
Potts: I was surprised, from our perspective, that we were net positive in assets. That was an interesting testament to our investment approach. We’d spent many years helping clients understand why they are actually invested and how markets work. That’s not to say that it wasn’t painful. We had a lot of upcoming advisors and clients who were nervous at that time. We joke now that if an investor actually slept through the last 10 years, they’d have a decent rate of return, without all of the drama that actually occurred.
Booth: It’s important to have an investment philosophy just like it’s important to have your own personal philosophy—one you can stick with through thick and thin. People who got out after the market dropped 50 percent needed 100 percent returns to regain ground. If you were out of the market and missed the up rally, it could take a long time to get back to even.
Potts: In early March of 2009, we were rebalancing portfolios as part of a normal rebalancing schedule—it wasn’t a market-timing thing. Some advisors said, “Are you rebalancing again?” We said, “Absolutely, we are keeping to the investment policy guidelines.” We were essentially selling fixed income and buying equities to ensure that portfolios were brought back in alignment with the risk factors clients had signed up to take. And we really saw the value of advisors who helped keep their clients invested with a longer-term focus. Around the same time, we did a series of conference calls for advisors and their clients to provide perspective. And that was actually another “aha” moment. We were sitting in our offices watching people stream in and out of Starbucks. Life went on as usual. And I realized that the power of markets is really all about these individual companies and their ability to make money in all kinds of markets. And if they can continue to make money, odds are that investors will also continue to make money. It really was a profound experience. Just everyday people walking in and grabbing their lattes, and knowing that Starbucks and all its suppliers were making a profit on each $2.00 cup of coffee they sold. And, this was in the throes of the 2009 bottom of the market. It reminded me just how powerful markets are, how powerful companies are.
The Advisor's Role
Swift: Alex, you mentioned earlier that Loring Ward has continued to grow and add assets, even during down markets. Could you elaborate?
Potts: We spend a lot of time educating advisors upfront, talking about why we do what we do, how we believe markets actually work, and how to think through helping clients. A great advisor is not a product sales person. He or she is providing comprehensive advice that is grounded in what is best for the client. It’s a lot easier to do that when you have an investment belief that you are not apologizing for. When advisors “get that” they never look for another investment methodology again and they spend more time working with clients, helping them solve all the financial issues that really matter. This is a profound change because, all of a sudden, advisors are not placing their value on the markets—they are placing value on themselves. That was a formative change for us. But I give credit to Dimensional for having the idea of spending some time teaching advisors why you do what you do.
Booth: It’s easy to say; the tough part is executing and sticking to the discipline.
The Problem With ETF’s