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].