Podcast: The Five Phases of Dealing with Market Volatility

risk-tolerance

Roger: It’s the reality. It’s easy to say, “Buy low and sell high.” It’s just people have a hard time doing this. Whatever is right in front of our face we assume is always gonna be there.

Clark: You’re listening to “Retire Happy,” with Roger Gainer, president of Gainer Financial and Insurance Services, Inc. Thanks for joining us. I’m your host, Clark Buckner. Behavioral economics show us that even when people think they’re making smart financial choices, they often let emotions take over and end up making poor decisions. So on today’s episode, Roger walks us through the five phases of dealing with market volatility. We’re going to unpack the strategies for dealing with all the noise with misinformation around markets and investment and what you can do today to start making smarter financial decisions. For more content like this, head on over to gainerfinancial.com. Enjoy the show.

Roger, welcome back. I’m really looking forward to talking with you again today. How are you doing?

Roger: I’m doing great. Every day is a good day.

Clark: Right.

Roger: And this is a choice, right?

Clark: I wanna just dive right into this topic. And before we really jump into the meat of it, I really want you to paint a picture of just what, as Americans, we’re experiencing. You know, we have the news, we have social media, we have all of these voices and all these influences happening around us of what seems to be happening and, you know, how quickly are you reacting? And can you just kinda start off by painting a picture? And this is gonna transition us right into today’s topic.

Roger: Well, I think what you’re referring to is the fact that, intellectually, we make investment decisions and financial decisions. We think we’re being calculating, we think we’re being analytical and rational. And then, ultimately, it seems that emotions take over and make decisions that aren’t always in our best interest. I have a report up on my screen right now called Quantitative Analysis of Investor Behavior. It’s by a company called DALBAR, D-A-L-B-A-R, and they’re kind of the J.D. Power of the financial world. And they do this report every year that indicates how investors actually do relative to the stock market in general. So in their executive summary this year, in 2018, the average equity fund investor underperformed the S&P 500 by 504 basis points. That’s over 5%. So the S&P lost 4.38 in 2018, but the average equity investor lost 9.42. And unfortunately, this happens every year. Not sure that’s not an isolated fact.

It’s the reality, you know. It’s easy to say, “Buy low and sell high.” It’s just people have a hard time doing this, and there’s all kinds of behavioral reasons that, well, frankly, they’re being studied. There’s a whole new field called behavioral economics that is getting a lot of research about investor behavior. And we have this thing referred to as immediacy bias. Whatever is right in front of our face, we assume is always gonna be there. So when the market goes up, you hear these articles come out, you know, “Gee whiz, the Dow Jones is gonna go to 35,000.” And in fact, in 2008, when the market was going down, it was, “Oh, the Dow Jones is going to 1,000.” So whatever’s gonna happen is gonna happen a whole bunch more in this direction, you know.

A few years ago, we had a big rally in gold, and then suddenly, out of the woodwork, “Gold’s going to $3,000. You must get in gold. The whole economy is falling apart.” And then people changed the narrative to support the conclusion. But it’s a way of staying sane, frankly, how our brains work. And so this immediacy bias can be, frankly, detrimental to achieving your financial goals because you let emotions take over. And I want our listeners to understand, this happens with professionals as well. So even mutual fund managers and hedge fund managers, folks like that, experience the same kind of emotions and make emotional decisions. Now, they’ve got more data, maybe, than the average investor available, but that data can be interpreted in different ways depending on whether your fear or…you know, “What is my other agenda?” That’s why every time I read somebody’s article that the market’s going up or the market’s going down or this is good or this is bad, I wanna know what their perspective is and where they’re coming from.

If you ever watch CNBC…do you ever watch CNBC? No? Okay. So they’ll have guests on and they’ll say, “Oh, you know, Joe here is gonna talk about how emerging market debt is a tremendous opportunity right now.” And then Joe comes on, and he has his 5 to 10-minute segment. And at the end of that segment, the interviewer says, “Well, you know, thanks, Joe. Joe is the manager of the emerging market debt fund for so and so mutual fund company, you know. He’s been doing that for 10 years.” Well, Joe really didn’t have much choice but to say it’s a good time to buy his fund, right? If he got up there and said, “I would be taking my money out of my fund, and I think it’s a crappy time, and you should be very wary of participating in this asset class,” his bosses would probably fire him. Because what’s his incentive, or her incentive, is to raise capital, because they get paid based on a percentage of how much money is in that fund.

So this is the kind of context that we’re hoping people have to their decision-making. So as the volatility has increased…and frankly, we’re in one of the most volatile times in memory, you know, it’s up 800 points one day, down 1,000 points the next day. It’s gotten to be so 200 or 300-point moves, we don’t even notice them. They just kinda go by the wayside. It’s just part of the deal, you know. Today, we were up 75 points, and the president spoke in front of the United Nations, and the next thing I know, the market has dropped almost 300 points as a result of some of those remarks. Now, does that really have anything to do with whether the economy is expanding or contracting? No, right? It just has to do with how people are feeling based on the remarks that he made in front of the United Nations this morning. So you know, it seems that the market more and more these days is going up or down based on emotions as opposed to based on decision-making and rational analysis. Does that make sense?

Clark: Makes sense. And you know, we’re talking about the five phases of dealing with market volatility, and that first phase is,as you described in your blog, of just turning on the news, and not only that, but we see social media, we’re surrounded by all these messages. So after that, after hearing all of these things, different perspectives and all this, what’s step two? What is phase two?

Roger: Well, step two is turn off the TV, right, get offline and get away from that noise so that you can digest what you’re hearing and you can step back and gain perspective on what’s really happening, and most importantly, how does it affect you? See, it may sound bad, but not everybody is getting ready to retire, not everybody is just starting out their career, you know. Where are you along your financial timeline and what is the context for your decision-making? We’ll talk more about that a little later in the podcast, but you know, it’s being able to get some perspective on all of this noise. You said it very well, Clark, with social media and the radio and television and online and streaming and all this other stuff, it’s hard to get away from the messaging that’s going on, and everybody’s spinning everything, and it’s hard to cut through the crap really and get to the meat. But again, it’s just about how does it affect you where you are and what you’re trying to accomplish?

And the third phase, if I may, is to think about how are you feeling. See, when we’re in uncomfortable situations, that’s that flight or fight kind of deal, and so we get into this emotional place, we become uncomfortable, and then we make knee-jerk decisions. And I would suggest that, over my career, I’ve seen people who are in investment strategies, frankly, that they’re just not comfortable with. They have too much risk exposure, they don’t understand what they’re invested in, they don’t wanna understand what they’re invested in, and then suddenly, something goes wrong. And all they’re thinking of is, “Gee, you know, did I make money? Did I not make money? Isn’t that all that matters?” And the truth is it’s not all that matters. So phase three is reassessing your risk tolerance, deciding how much volatility is comfortable.

Now, I hate the concept of risk tolerance, to begin with. I think it’s more like volatility comfort as opposed to risk tolerance. Risk tolerance makes me think of, you know, “How many times can I punch you in the shoulder before you ask me to stop,” you know? How much pain can you handle before you go, “Ow?”

Clark: Right. That’s a good way to think about it.

Roger: Yeah. You know, money should help you sleep better at night. It shouldn’t be keeping you awake. And if you find you’re laying in bed, stressing over what the market is gonna do tomorrow or what it did today or, you know, whether we’re going into a recession or not going into a recession, those kinds of things, I want people to be in assets and use financial tools that help them to sleep better at night. That really is the bottom line.

Clark: Right. I love that. And you know, ultimately, it’s about retiring happy, and that’s kind of the whole message. I love it.

Roger: Yeah. Where am I along the…you know? So if you’re 30 or 40 something, it may be more a priority of buying a home or starting a business or, “How am I gonna pay to send my kids to college?” But that retirement thing is always in the background. You always need to be making progress towards it, for sure. And frankly, if you start early and develop habits that are consistent through your working life, a lot of that stress goes away because you’ll have time working for you in overcoming that short-term noise. So that would bring me to phase four, and that would be to ignore your feelings. A lot of people say…

Clark: Yeah. Let’s unpack that. What does that mean?

Roger: What does that mean? Well, a lot of people, you know, say, “Gee, it’s gonna come right back, right? I’m still uncomfortable. I’m just gonna close my eyes and stick my head in the sand.” I had a client, very well-to-do individual, making a high six-figure income in the early 2000s when the dot-com bubble burst, and he had been very aggressively invested in his company’s 401(k). And one day, we were sitting and talking, and he said, “You know…” I said, “How is your 401(k) doing?” And he said, “Well, I have no idea.” I said, “What do you mean?” He said, “I’m so upset that I haven’t opened a statement.” And back in those days, you got monthly statements, not quarterly statements. He said, “I have this box over here. I’m haven’t opened a statement in over 18 months.” And I said, “Well, that’s not really a great idea.” And he said, “Well, here, you can take the box. I’m kind of afraid to know, you know, and see what the market’s doing, but I don’t know what it’s doing for me.” Well, he had lost over 30% of his money at that point, you know, and he just…that’s the ignore your feelings, right? Ignore what’s happening because it’ll go away. That doesn’t always work, right?

Brings me to the fifth phase, and that’s meeting with an adviser. We touched on this earlier, but there’s study after study that shows people who have that sounding board, they have that partner. And I’m talking about, you know, there are good advisers and bad advisers, just like there’s good dentists and bad dentists and good attorneys and bad attorneys. But if you have a relationship with an adviser, someone that you can trust their perspective, that understands you and your situation, that’ll help you to calm down and make more rational decisions. And the first thing they’ll help you to do is figure out why you’re doing what you’re doing, you know. Once you know your why, everything else…

Clark: Find your why.

Roger: Yeah, find your why. We’ve talked about that before. But once you know your why, you’ve got to…then now, the context to make good decisions, you know, “Am I saving for retirement? What kind of a retirement do I want it to be? Am I, you know, gonna chuck everything and buy an RV and live out of that for the rest of my life?” It’s that context which leads you to understanding what it’s gonna take to provide you the life you’re looking for and then your decision-making becomes much better, your decision-making becomes easier.

A few years ago, a client of mine brought me…her mother had inherited some money and was extremely risk-averse. But there was a concern, if everything was gonna be sitting in savings accounts, was she gonna have enough income, you know, to live? And she lived a pretty modest life. But we were able to put in a strategy that guaranteed the amount that she’d inherited would stay intact in the estate, and yet, she could spend what she needed to and we removed the fear, totally, of running out of money. And this really helped this client, and every time I see her, she smiles and she says, “Thank you,” and she’s just happy. She does a lot of traveling now. She just seems happy all the time, and it’s just because she was able to work with me, her adviser, and figure out what that money was for, how she wanted it invested. We still have nothing invested in an at-risk situation. Little bit of real estate in a very conservative offering. But outside of that, everything is wrapped in guarantees, which is what made her happy.

This was part of a process of working together to help her understand and clarify what’s the point here. Okay? So you know, the value of an adviser can be measured and, in most cases, will improve performance fairly dramatically. That is one of the conclusions, by the way, in that report I mentioned earlier, the DALBAR report about actual investor behavior. Know what you’re doing, why you’re doing it, and that’ll help you to limit your losses and let your winners run.

Clark: Wonderful. And that fits back into something we often like to talk about, is the Thought Organizer, and that is really designed to do what you just mentioned, and that’s to know what you’re doing and the why behind that. So, how can someone get their Thought Organizer, and why is that so important?

Roger: Well, the Thought Organizer really is the first step in that process. So whether you wanna work with me or another adviser, feel free. We feel this tool is so valuable. We make it available right on the first page of our website, www.gainerfinancial.com, and scroll down to the bottom, and you can download a free copy of the Thought Organizer. That tool is designed to help you understand how you feel about risk, how you feel about what your priorities are, determine those priorities, order them, and then you’ll have the context, or at least the beginnings of the context, for your decision-making so that you can, well, ultimately have a happy retirement.

Clark: Wonderful. Roger, thank you so much, as always. And I’m looking forward to our next session.

Roger: Very good. And always good to talk to you.

Clark: Roger L. Gainer, RICP, ChFC, California Insurance License number 0754849 is licensed to sell insurance and annuity products in California, Illinois, Arizona, Nevada, and Oregon. Roger L. Gainer is an investment advisor representative providing advisory services through HFIS, Inc., a registered investment advisor. Gainer Financial and Insurance Services, Inc. is not owned by or affiliated with HFIS, Inc. and operates independently.