By Ian Harvey
While history is no accurate predictor of future performance, conventional wisdom tells us when markets go down, they always come back.
We are taught this lesson in school, in CFP® programs, or from those in our respective communities who have taught us to “stay the course.” Since I graduated from Virginia Tech’s financial planning program, I have leaned heavily on the belief that markets will experience downside volatility, and when they do clients should remain invested to participate in the recovery.
A belief solidified by intra-profession conversations about how to react when difficult markets present themselves. During upward trending markets, these are easier client conversations. As we know, client conversations are tougher in downward trending markets. Clients waver, their true risk-tolerance is tested, yet our job remains to keep them as “on track” as possible.
First Recession For Many
Perhaps equally prevalent in our intra-profession discussions is the idea that all down markets are relatively similar in the long run when viewed unemotionally. We bemoan the phrase, “this time is different.”
If we continue to believe that markets have not fundamentally shifted, conceptually, this time is not different. A statement we can only confirm when we look back on this period and markets have since recovered.
Though, for many current advisors this is the first time we are experiencing a recession. When we woke up on February 19th, there were global concerns about the novel coronavirus, COVID-19, but it had yet to start impacting our client’s performance reports.
On February 20th, the bear market began and for the first time in our careers, things were different. Words of wisdom we learned from other’s experience began to be truly tested. For the first time, we faced the reality that we do not have the benefit of having guided clients through the Great Recession, the dot-com bubble, or any other notable contraction.
What we do have is our experience to date, as well as a profession that has grown through the experience of many market cycles and benefitted from the age of information.
If you have only been practicing in the past few years and you are concerned about our current economic downturn, remember that you have experienced short-term uncertainty. Perhaps in the form of geopolitical risks both domestic and abroad, fears over monetary policy at the end of 2018, or clients simply asking, “how long can this bull market continue?”
To date, you have leaned on your understanding of markets and behavioral finance and the experience of your mentors and firm leaders, while educating your clients with each conversation. The coming recovery may be longer than you have experienced, and clients may be more nervous than they typically are, though, your training remains sound and the work you have done to educate your clients is hopefully helping you navigate these conversations.
Lessons To Apply
I encourage you to continue seeking to understand previous contractions, distilling information with your mentors, and research lessons learned. You can apply these lessons with your clients, and perhaps even within your firm.
I am reminded of George Santayana who wrote, “Those who cannot remember the past are condemned to repeat it.” As professionals, it is our duty to understand what the history of our profession teaches.
Consider for a moment who the Fed turned to during the Great Recession; Ben Bernanke, a student of the Great Depression. In a speech honoring Milton Friedman, Ben Bernanke described the work of Milton and his co-author Anna J. Schwartz as “the leading and most persuasive explanation of the worst economic disaster in American history, the onset of the Great Depression.”
To close his speech Bernanke alluded to a version of George Santayana’s phrase when he stated, “You’re right, we did it. We’re very sorry. But thanks to you, we won’t do it again.”
We too can study the body of work done by our predecessors, add the context of today’s world, and apply the lessons learned. Over our profession’s existence, leaders in the financial planning profession have continued to research the impact of large market swings on both our client’s portfolios and their behavior.
The experience of our peers and mentors has translated to numerous research papers, Journal articles, and textbooks guiding the education of new (and experienced) planners year over year. Now is the time to arm yourself with as much information as possible and learn from the wisdom earned through years of experience which can be shared by our colleagues and firm owners.
For financial professionals, these are the times that try our resolve. We will get through this together collectively using the foundation laid by those who have been through similar times to guide our path. New lessons will be learned, and we will be a better profession, together, when this recession concludes.
Originally from the Jersey Shore, Ian lives in Manhattan. A graduate of the Financial Planning program at Virginia Tech, he earned his CFP® in 2014 and has always operated as a fiduciary advisor for clients. He co-founded the Financial Planning Association’s (FPA) Student Chapter at Virginia Tech, which grew to be the largest student organization in the country in its first year.
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