The One-Percent Letters Are On Their Way

There’s a tradition at the wirehouses whereby on any day that the overall US stock market has a greater decline than 1%, an email letter is prepared to be blasted out to advisors’ clients sometime in the early evening before they get home from work to check their portfolios. My advisor friends call them “One-Percent Letters”.

It’s a bit of an anachronism given the fact that everyone who cares how the market might have done on a given day has a smartphone loaded with finance apps sitting right in their pocket (palm?) at all times.

But still, it’s prepared and advisors are able to decide whether or not they want to send it out and which clients need to get it.

The gist of the letter is usually some ad hoc “chief strategist” explanation for why stocks sold off, incorporating the latest chatter from the headlines that day. This is, of course, followed by the soothing reminder that volatility comes and goes and that everyone should stay the course and relax.

It’s not a bad message, provided that the client actually has a portfolio that is both aligned with their longer-term financial plans and that their strategy is durable enough to deal with whatever the market is going through. Many do have durable portfolios with built-in mechanisms to get them through it, but plenty don’t.

I’d mentioned that the next market event would be the one that separated the men from the boys, the ladies from the girls. I think we’re in it, now that the positive feedback loop has totally broken down. The Russell 2000 is now flat over the last 18 months with nothing but chop to show for our troubles. The smallest decile of market cap stocks within the Russell are absolutely obliterated, with average losses of 45%.

It’s all happening. I don’t know that a letter will necessarily do the trick for advisors who’ve been performance-chasing in “market leaders”, momentum stocks and IPOs. Now that the sellers are hitting that cohort, things have (finally) gotten real.