It’s hard to be patient these days. Whether you are an advisor or an investor, markets are volatile, the economic news is terrible and clocks everywhere are ticking toward retirement. Patience, and lots of it, is what we need right now. In the current context, though, being patient doesn’t mean doing nothing. I’ll come to that in a moment. What it does mean is staying the course, staying on track.
Staying on track only works if you are on the right track to begin with. In this case, we are actually talking about two different tracks. The first is the track that should be set for the investor by the advisor: a retirement income plan, prepared by the advisor with lots of input from the investor. The plan takes into account the investor’s current financial resources, willingness and ability to tolerate risk and retirement goals. Staying on this track doesn’t mean there should never be changes. On the contrary, every plan needs a periodic check-up, especially now with so many investors gaining insight about their truest reaction to volatile markets. The bottom line here is that a good plan will weather a lot of storms; it is not a quick fix for whatever is happening to markets at any given point in time.
The second track is much less personal, but it is just as important, that is, the track set by governments and central banks around the world to get the global economy and global financial markets back to better and more normal times. Economic stimulus by governments comes in the form of tax cuts, short-term spending and longer-term investment in infrastructure – the roads, bridges, airports, telecommunication facilities, schools, universities and health-care facilities that will provide long-term economic benefit. Stimulative monetary policies from central banks (lower interest rates and liquidity support) get money out to financial markets and financial institutions. Even though this is the right track to be on, there is a lot of impatience to travel this path quickly — people want to see evidence that these policies are working.
Individual investors aren’t the only ones who are impatient; entire markets are, too, and they get quite volatile any time there is the slightest doubt about monetary policies or whether a particular government stimulus plan will work as expected. To paraphrase influential economist and investor Benjamin Graham, markets are more like a voting machine in the short-term and a weighing machine in the long-term.
We can easily understand why markets react this way. At their most basic level, markets exist to efficiently price whatever it is that they trade. In order to do this, they must have all relevant information. Over the past 18 months, however, markets and individuals alike have struggled to get that information. Think back for a minute and you’ll remember that there was an unrelenting series of questions that emerged, one after another: How serious was the financial crisis? What effect would credit-market freezing have on economic activity? And now? What effect will government stimulus plans have on economic recovery?
We must remember that solutions take time. With the instant availability of information, we forget that solutions themselves are not instantaneous. As this column is being written, the U.S. stimulus package is in the midst of being implemented while the Canadian stimulus package is making its way through the legislative process. It will take time for these measures to work. Much the same can be said for monetary policy. Interest rate changes can take months to have an effect. Liquidity support being offered by central banks to financial institutions and financial markets also takes time. These measures will be working under the surface, even while we continue to hear terrible economic news. Even when policy measures do have their desired effect, it will take time for the statistical agencies to measure and report the improvement. I wouldn’t argue in favour of patience if I didn’t think the solutions being put in place would have a positive effect.
I said earlier that patience doesn’t mean doing nothing. This brings us back to the relationship between advisors and their investor clients. If they haven’t happened already, this is a great time to have some valuable conversations that probe how clients feel about risk and their long-term investment or retirement plans in view of recent market events. Do your clients have an understanding of their current or projected expenses in retirement? Do they know what their sources of income will be? Do they appreciate that they have the option to modify their retirement date or work in retirement?
I almost entitled this column “What we need is patience, but what we feel is panic.” I didn’t use the word “panic” because I didn’t like its meaning. Obviously, though, many clients (and a few advisors, no doubt) are feeling it. Even though we know that panicking does no good in any circumstance, no one is immune to it. That said, I suggest that staying on our personal investment tracks and understanding the simple fact that economic policies take time to have an effect, will help us avoid feeling panic. Relevant conversations between advisors and their investor clients will also help. I am not so naïve that I believe these suggestions will completely eliminate feelings of panic, but I do believe they will help. Being patient and staying on track will help your clients get to the point where the “P word” is no longer a threat.