As I was preparing some notes about the markets for this article, I had the opportunity to talk with my high school daughter. We both share a love for music, and I asked her what she was listening to lately. I was expecting her to talk about bands I hadn’t heard much about, but to my surprise she started listing off bands I knew well from the ‘80s and ‘90s. She followed that list with the comment “You know…the classics.” That certainly was not what I was expecting…and of course, we could debate whether hair bands of the ‘80s or ‘90s are in fact “classics!” But what’s notable here is how different perspective is.
When a market is volatile—or sharply down—it helps to remember how much perspective matters. There’s historical perspective, of course. And then there’s personal perspective, by which I mean understanding relevance to personal goals.
"Am I going to be happy?”
During a recent client meeting, the first question I received as they walked in the door was “OK, am I going to be happy?” The right way to answer that question is with the perspective of the client’s individual financial plan.
For this client we had done a great deal of financial planning, had worked out how much they needed to spend near term, what their long- term goals were, and agreed on an investment plan to meet those goals including liability matching for their near-term cash flows.
So, to answer the question, we started by reviewing the client’s return numbers. I let them know that while their investments are down this calendar year and a relatively small percentage from a year ago, they still have averaged positive results since we started investing.
We then discussed their goals. The recent movement in the markets will not keep them from achieving any of their retirement goals, based on historical data. The client’s compounded return should keep them above the return needed to achieve their long-term goals. Furthermore, we have created secure cash flows within their portfolio for the next 24 to 36 months, using investments that will not need to be liquidated during times of volatility.
So, while the client was not happy with the recent market downturn, they were pleased to see they were on track to do the things that their investments were meant to achieve.
Putting market movements in perspective
The last part of the conversation was to put into context the recent market movement. Being a chart person, I had them focus on two charts for perspective.
- What’s UNUSUAL is the recent movement in the bond market. Using a two-year rolling return for bonds, there have only been six times since 1926 we have experienced this magnitude of negative returns for bonds. Most of the time, after a movement in bonds of this magnitude, the following years tend to be above trend as shown in the chart below.
- What’s USUAL is that over any calendar year 70% of the time stock markets are positive. In the chart below, you’ll see that even during those periods of positive calendar returns, for almost every year in history, there has been a decline from peak to trough in the stock market of greater than -5%. This has been a typical, or usual market, from that perspective.
Although not necessarily happy, the clients felt comforted knowing they still were in touch with their goals and that their investments were structured to achieve these goals. I’d encourage you to connect with your advisor to review your financial plan and discuss if you’re still on track to achieve your long-term goals.
Perspective is everything. Though if I ever hear some of those ‘80s or ‘90s tunes in the elevator, I might just have to challenge my daughter’s perspective that those tunes qualify as “classics.”