You can listen to this post if you’d prefer:
Part I:
Someone once asked me if there was a way to generally avoid bear markets and still be an investor. My answer was that there are different ways to do this, but they will work at different times and when they don’t work the results will be catastrophic. And nothing always works.
But there is one method to avoiding bear markets that will most certainly work…reliably and consistently for anyone who wishes to attempt it.
There’s a very simple way to avoid bear markets. What you do is pull all of your money out of the stock market and just let it accumulate in your bank account. Others will make huge fortunes as sustained bull markets carry on for periods of five years, seven years, or longer. We’ve had eighteen year secular bull markets. Stocks will rise hundreds of percentage points for years on end. Those people who participate will be forced to endure regular ten, twenty and even thirty percent drawdowns along the way. They will feel uncomfortable during these drawdowns, sometimes for months on end. There will even be people who mock them for having shares in companies that are not currently selling for all-time highs. And then there will eventually be a recovery. There always has been. But still, those people had to have gone through some difficulties in order to still be invested during the recovery. They might have even looked bad for a while.
But you can avoid all of that. Simply don’t invest. Or hedge yourself fully against all potential downside and upside (that’s how it works, can’t do one without the other). Obsess over “managing risk” all day. Venture nothing, gain nothing, sleep like a baby.
Wake up in twenty years and wonder why your portfolio is running in place. And then cry like a baby. “Why was I investing for minimum loss rather than for maximum return? What charlatan convinced me of that?”
And it will be too late.
Time is a thief. It will take ten years from you in a blink. It will whisk your children off from the playroom in your home and deposit them into a college dorm, just like that. It will steal the hair from your head, the muscle tone from your body, the collagen from your face and the cartilage from your knees. It will run off in the night with your only opportunity to earn compound returns in the investment markets if you let it. You cannot get that chance back. Time took it from you. And time never stops taking from you.
This starts with “I think I’ll sit in cash until after the ___ blows over, then I’ll get back in.” One month turns to three months, which turns into a year, then two, then five. Now you’re praying for corrections and crashes with the rest of the miserable sonofabitches who thought they knew better than everyone else. You stop getting haircuts and shaving. What’s the point, the world is going to hell. You start reading anything pessimistic you can find to confirm your earlier choice to stop investing. You start a Twitter account and yell at people who are doing better than you. Your friends are invested and it makes you sick. You begin to live more of your life online and withdraw from your actual life. You were once a prosperous Hobbit, cheerfully farming your land and singing your songs in the sunshine, greeting your neighbors each morning and lackadaisically puffing a clay pipe on the porch at eventide. But now you’re a gollum, ribs showing, teeth bared, desperate for a quarrel, thrashing about in a darkened prison of your own making, surviving on little else besides raw fish carcass and the occasional Hussman letter that someone mercifully posts outside of a paywall – “Thank you Henry Blodget, I needed that…” CAPE Ratio charts are the Precious. In a quiet moment of doubt, you can feel them in your pocketses. “I’m right, the market is wrong.” Repeat it like a mantra, let it echo incessantly off the cavern walls for an audience of one.
This is not how successful people carry themselves.
For over twenty years I have observed the behavior of wealthy people who invest, but do not work in the investing business. Civilians. Clients. Normal people. And I have seen it all, every variety. But there is one commonality shared by most of the successfully invested wealthy people I have known and know today. I would like to share that with you now:
Wealthy people accept risk.
Wealthy people don’t obsess over the potential for drawdowns to the point where they paralyze their portfolios or stop investing altogether. They don’t focus on risk all day, every day. They do something even more powerful. They learn to endure. To accept risk and only take the amount of risk and type of risk that is appropriate for their own situation. They accept the tradeoffs. “No I cannot have a top performing long-term portfolio if I can’t bear to see volatility or temporary losses.” They accept the unbreakable linkage of risk and reward, as autochthonous to the investing experience as the soil beneath our feet.
And that’s how they stay wealthy. Not by avoiding swings in price, but by living through them. In earlier times, wealthy families were fortunate in that the values of their assets weren’t pinging the phones in their pockets all day or being breathlessly relayed across a thousand media sites and channels. The only way you knew you were in trouble as a wealthy person one hundred years ago was when the crops failed and you couldn’t make the interest payments on your land. Wealth sprang out of the soil or was mined in a hole in the ground and it was largely in God’s hands. Church attendance was high. Drawdowns in the values of your stocks and real estate investments were normal and acceptable. So long as the dividends kept coming and rents were being paid, the price from day to day hadn’t been so in your face all the time.
Today it’s the opposite. Dividends and rents and earned profits are nice, but these days we’re all playing for higher account values, higher takeover values, higher funding rounds, bigger multiples, larger market share, faster capital appreciation. The new scoreboard doesn’t much resemble the old one, because times change and the numbers evolve. Our access to these numbers is constant and unlimited. When we’re paying attention, the numbers are ubiquitous. When we’re purposefully not paying attention, the information finds a way to find us. Some alert somewhere is going to get you – on your phone, on the screen, on your watch, in your AirPods. No escape. In Manhattan you could walk by the wrong building and see an electronic ticker tape in the front window.
Which makes enduring drawdowns and market setbacks harder for the modern investor than it had been for the investor of one hundred years ago. There are many advantages for today’s investor class, of course, but this is one of the detractions. And it’s a big one when you consider how substantial the psychological component of investing is.
Part II:
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One of the best projects I’ve ever worked on in this industry is the creation and implementation of our Milestone Rewards program. In September 2015 we announced that we would be reducing our fees for clients who had qualified by remaining loyal to their own financial plans over the course of their first 36 months with us. There are a few other stipulations involved but the big picture is that we wanted to reward clients who were adhering to all of the things we believe are important to long term returns.
We’ve worked very hard to keep our clients invested over the years, employing a relentless emphasis on investor education and constructive market commentary on the blogs and elsewhere. But we can’t do this all by ourselves. It doesn’t work if our clients don’t buy in to the research, the philosophy. The content may inculcate them but then they’ve got to fight to stay inculcated, through the best and worst of what the markets and economy have to offer.
So far, so good.
Since that announcement five years ago, 419 client households have achieved the Milestone Rewards marker, accounting for some forty percent of all existing client households. That’s amazing. Partly it’s because we’re very selective about whom we will allow to become a client – they have to get it. Not everyone gets it, and that’s okay. But partly it’s because of the work our client-facing advisors and client service reps do each day to keep everyone on track and focused on the big picture. And partly it’s all of the messaging we work so hard at as a firm. The combination of these things is powerful.
As we speak, an email is going out to the 26 households who have just qualified for Milestone Rewards for the first time beginning this quarter. It’s a letter from our Chairman Barry Ritholtz reminding them of all they’ve been through in order to get to this point, and how important their own behavioral contribution has been to the results.
Just to give you some sense of who these 26 families are, only ten percent of them are from the Northeast, despite the fact that we’re headquartered in New York. Ten percent are from the Southeast, while forty percent are from the Midwest, and then another forty percent are from the West coast. The average age in this class is 60 with ten percent of them below age 50. Half of these households are between 50 and 70, and forty percent of them are above 70. Which means that the reduced fees associated with Milestone Rewards will be meaningful for years (and decades) to come; a tangible benefit for remaining steadfast in the face of scary headlines, market volatility and other threats – real or perceived.
Lowering our clients’ fees, for the rest of their lives, is our acknowledgement of their calm, courage and sanguinity. We’re not giving anyone anything – they’ve earned it. And something earned is always more meaningful than something gifted.
So congrats to the first Milestone Rewards class of ’21. Staying the course through thick and thin isn’t always going to feel like a walk in the park when you’re in the moment. It will only look easy in hindsight, when enough time has passed.
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New year, new goals, new outlook. Talk to us about your financial plan today. Your journey starts here.