This year has not been a year of clarity. Uncertainty in many areas of life is high and emotions have been stirred. We have all heard the adage that people make financial decisions based on greed or fear, but I have not seen fear dominate like it has in 2020 since the Great Recession.
I asked a group of colleagues what mistakes they have seen people make this year and almost all of them were rooted in fear.
Impulse Purchases
Covid-19 kills people, and it is highly contagious. We all know life is short but Covid has shown us it can be even shorter than we think.
The heightened awareness of life’s fragility caused a couple of our clients to make impulsive purchases in reaction to various uncertainties. One of our elderly clients bought a sports car. I admit, he looks good sitting in it with the top down, but he probably should not be driving any car let alone one that can go zero to 60 in under four seconds and tops out at about 170 mph.
Another client bought a boat. “If I don’t do this now, I may not be able to later,” he told me. He is right about that, of course. Nonetheless, from a financial standpoint, it is unlikely that this will turn out well. Fortunately, he is an experienced sailor so I am confident he can get value from the use of the vessel. In addition, they have ample resources and will likely suffer more from the hassle of unloading the boat in the future than the monetary cost.
Unfortunately, some who are buying things for similar reasons cannot afford the financial impact of impulsive buys. Stacy Francis, CFP, CDFA, CES, president and CEO of Francis Financial in New York, tells of a client that wants to buy a vacation home outside the city. The purchase would require a significant cut in expenses and additional years working for the husband who is in his early 60s.
Says Francis, “I am not comfortable, and we shared this. They are being emotional and see this as a safe haven from the city unrest – rioting from earlier this year and concerns about a third wave of the virus. They have put in an offer on the home anyway.”
Life Choices
Trying times can make us impulsive about life choices as well as purchases. A colleague told me of one of his clients who was a flight attendant for a major airline. The client became so fearful of losing his job or getting the virus when flights resumed, he “preempted” the airline and quit to pursue a musical career. Music has always been his passion.
I support pursuing one’s passions, but some forethought would have been much better for him financially. If he had been let go, there would have been an exit package. If he had not been let go, the reduced flight schedule would have provided more time for practicing his guitar and writing songs. Today, his playing is better than ever but there is no place to play and the airline will not take him back.
Careers are big life choices but at least as important is who we choose to share our lives with. Several colleagues reported clients who are realizing they are not married to the right person. Most don’t know who they should be married to, but they are convinced it is not the person to whom they are currently bound. Being trapped together at home 24/7 can be illuminating.
Shiny Objects
While fear stoked the impulse buys of shiny objects like boats, for some, fear drives them to want gold or other precious metals in large quantities as a doomsday hedge. This year’s events provided plenty of reason to harbor political anxiety. We are seeing significant societal change and it is hard not to worry when there are violent demonstrations and mounting federal debt. As a result, the gold salespeople are out in force, reinforcing the fears.
In the more extreme scenarios, an eye toward practicality can help some clients realize that if there is a true collapse, having gold may not save them. Exactly where and how do you spend your gold? Do you chip off a flake from a gold bar? Will your friendly neighbors stay friendly if they know you have gold on hand?
Most clients are not fearing total collapse of government and society, but many are concerned about debt levels. When gold as a counter to economic disaster comes up in my practice, I am nice, but direct. The “Buy gold now because of the impending collapse of the dollar due to high debt,” pitch is garbage. Debt levels are concerning but the outfits making the pitch are playing up and preying on fear.
Heck, the pitchmen don’t actually believe the dollar is about to collapse and gold will be the safe haven either and I point that out to clients. Think about it. If gold is so good and the dollar is so bad and you need to buy now because the collapse is imminent, they would NEVER offer to trade their wonderful gold for your lousy dollars.
A Different Sort Of Panic
I’m not going to spend much time on clients that panic and go to cash. It is a choice almost all come to regret and one the media and planning community actively try to get people to avoid. For the most part those efforts seem to work. What seems to be more common are lowering equity exposure or declining to rebalance.
The first form of reducing equity observed is a variation on panic selling. Instead of cashing out entirely, a compromise of sorts is reached, and equity exposure is lowered but not eliminated. For instance, a 60/40 investor decides to drop to 30/70 instead of going to all cash and fixed income holdings. This is still digging a hole, albeit a less deep one than a full cash out but it also makes the climb out more difficult as there is less equity to participate in the rebound.
The second form of reducing equity has popped up since the rebound. As portfolios recovered, many decided they have had enough of the ups and downs or are sure that we will have another crash given all that is happening so they want to get out now. For some clients this is not a mistake but a reasonable reassessment of the relative importance of growth versus stability with stability garnering a premium. For others however, they are trading added portfolio stability for less purchasing power over time.
One of the most common requests from clients that were not inclined to stick to their plans during March and April was vetoing any rebalancing. They simply could not stomach the thought of buying into equities. Fortunately, most clients let us stick to our rebalancing discipline. We did what we said we would do in a bear market (stay disciplined and patient) and we were quickly rewarded for doing so.
It is unlikely the next bear market will take a round trip as lightning fast as this one, but I believe the Covid experience will help clients when that next bear growls. We can show them exactly how the math of rebalancing worked for them.
Look, the simple fact is that the fears of 2020 are not baseless. We are facing serious issues that should make uncertainty and fear understandable. However, part of our job as financial planners is to help clients deal with that fear and avoid making poor financial decisions for their families. Making decisions based on anxiety about what their balance might read in the near term has a strong record of producing bad results.
Perhaps the worst manifestation of fear is fear of looking fearful. As a friend put it, “The biggest mistake is clients being afraid to reach out to us, even if they just need to chat.”
The financial planning community pounds the table for calm in the face of crisis. That is appropriate but we must be careful not to stifle our clients’ need to express their fears. They may not want to look like they are panicking about the markets or admit that being cooped up is affecting them. Perhaps they worry about societal change, how high taxes could go, or the outcome of the election.
The market may be doing all right for 2020 but we shouldn’t assume clients are doing as well.
Dan Moisand, CFP, has been featured as one of America’s top independent financial planners by Financial Planning, Financial Advisor, Investment Advisor, Investment News, Journal of Financial Planning, Accounting Today, Research, Wealth Manager, and Worth magazines. He practices in Melbourne, Fla. You can reach him at [email protected].