Know Thy Self

“Circumstances don’t make the man; they only reveal him to himself.” ~ Epictetus

I apologize for the gender specific quote, but I think everyone gets the message: Know thyself. It is at times like these that previously unknown internal fears reveal themselves. Due to my 20-plus years of experience, I know for certain that clients will respond with different risk tolerances when the markets are up versus when the markets are down. Put another way, investors are more aggressive than they should be in up markets and, similarly, respond too conservatively during down markets. That’s because, as a group, we feel more confident when markets are up. And, except for a couple of pullbacks, the markets have moved mostly upwards for over a decade.

In 2018, I saw many investors questioning their asset allocation (amount of stocks/bonds/cash in their portfolio) when the markets pulled back almost 20%. It was the first occasion in some time that investor’s experienced significant declines in their account values. During that correction, I suggested letting the markets rebound and then revisiting – but not during the decline. Once the rebound occurred, I conversed with many of these same investors. Since the markets had recovered, so had their spirits and most did not agree to make changes.

In light of this severe drop, you can imagine many investors are once again questioning their allocation. I also know that many people refuse to voice their fears, only silently contemplating. Understand this: Those fears are normal. We know investors’ fear of loss is greater than their satisfaction from gains. With that in mind, how do you feel right now? Are you questioning your asset allocation? Are you being too aggressive out of need or greed? Don’t dwell on what could have been – it’s too late for that. Focus on what could be. I am not advocating changes now, instead plan your changes for when the markets recover.

Here’s a great piece from T. Rowe Price. It illustrates the relationship of risk and return with a given allocation to stocks and bonds over the past 25 years. Most people know that an increase in stock exposure will increase the volatility in your portfolio. What you may not understand is how much more in return you should expect for that increase in volatility. I will just focus on two of them:

• If you had 100% stocks, you should know the best year was 37.6% return and worst was a -37% retraction! Average annual return was 10.2% and you would have been down 5 years in the past 25. That’s one in five, with an average decline of -16.9% in those years. Sound like you?
• If you had 20% in stock and 80% in bonds, you should know the best year was 22.1% return and worst was a -4.6% retraction. Average annual return was 6.7% and you would have been down just two years in the past 25. That’s one in 12.5, with an average decline of -2.6% in those years. Sound like you?

If you have done financial planning with us, we have estimated the average return you need to achieve your goals. Let’s make sure your portfolio is aligned for need and not for greed. Money should provide you with a feeling of security, not anxiety. Certainly, Black Swan events like this one are the exception to the rule, but they help reveal our true self. The question is “will we listen to that inner voice and act accordingly?”

If you feel the need to review, call or email us. This is what we do, and we are here to help. We may not be able to meet in person right now, but we can discuss over the phone and/or utilize simple video conferencing.

Stay healthy and stay calm,
M. Shane Gaddy, CFP®, C(k)P®
Managing Partner-Financial Planner