It's Test Time for DIY Investors

Springtime in Georgia is my favorite time of the year. Nature is bursting at the seams – the azaleas are in full bloom, the greenery and pollen count are (literally) breathtaking, and the carpenter bees are busy boring holes in my outside deck. In normal times, March Madness is nearing its zenith, Masters’ weekend is tantalizingly close, the countdown to Easter is upon us, and summer’s promise is well within reach.

This year is different, and as I write from my guest bedroom and home office in full quarantine with my wife and three young children, I am reminded of how dramatically life has changed over the last 2 months. Advising clients during tumultuous times is tough. I learned this is 2008 when I was relatively new to the business, and I am learning it again as I speak to person after person who is understandably concerned as the coronavirus spread wreaks havoc on the world and its underlying capital markets. The optics right now are perhaps worse than we will ever see again in our lifetimes. If we are lucky, the comings and goings of our everyday lives have come to a screeching halt, leading many to feel as if they have little to no control over much of anything. This is particularly challenging when financial news is so grim, with every other headline drawing comparison to 2008 (or worse), and market volatility relentlessly reminding us that our future is far from certain. Given my early career experiences in financial journalism, I shared an insider’s perspective years ago regarding the media’s determination to capture and retain our attention, oftentimes through fearmongering and negativity.

For DIY (do-it-yourself) investors, the current environment poses a significant test.

We, as human beings, are woefully inept at ignoring market gyrations and keeping our feelings and emotions in check despite plenty of empirical data proving it is better if we do so. Our most common impulse, which is biologically tied to our fight or flight response, is to raise cash when times get tough. Unfortunately, this is especially dangerous since any relief felt from missing further declines will support an immediate fear bias which can make it difficult to get back in when markets head the other way.

Looking at metrics going back to 1930, research shows if an investor missed the S&P 500’s 10 best days in each decade, total returns would be 91%, which pales in comparison to the 14,962% he or she would have earned by holding steady through the ups and downs. As the late Jack Bogle, founder of Vanguard Investments, used to tell investors during times of turmoil: “Don’t do something, just stand there!” Numbers and mantras such as these, alongside an affirmation bias fueled by many years of an upward sloping stock market, have led many to believe that going it alone may be the best course of action. The rapid advancement of technology, online trading platforms, robo advisory firms, and low-cost investment products allowed robo advisors to amass $283 billion in assets under management (AUM) through the third quarter of last year – the fastest growing segment in wealth management. With projections for the industry to reach $1.26 trillion in AUM by 2023, many traditional brokerage firms, including J.P. Morgan and Morgan Stanley, have entered the space. But just like every projection these days, I suspect estimates of a widespread migration toward human-free advice will be revised downward in the coming years. The reason? The paradox of control.

On Monday, March 2, popular stock trading app Robinhood experienced a total system outage as stocks plummeted during the initial heights of the coronavirus plunge. It crashed again on March 3, and then again on March 9, all during days of pronounced volatility and heavy user traffic. I can only imagine what it must have felt like for Robinhood’s clients who were unable to access their accounts during those frenetic days, particularly since having control over their investments is what presumably led them to the platform in the first place. Not having a live voice to offer guidance, support and advice during truly unsettling times likely added to their angst.

The failure of the technology, while disturbing, also reveals the potentially harmful human tendencies against which a properly trained advisor can guard. Unlike real estate and other illiquid asset classes, many investors view portfolio drops as “lost” capital simply because stocks, bonds and certain alternative investments mark-to-market daily and in real time. As a result, they find it hard not to pounce when “sales” occur in the market, either by pushing in cash too early or running for the exits at the first signs of trouble. Whether those looking to access their Robinhood accounts during the heights of the volatility in early March were seeking to buy or panic sell is anyone’s guess, but taking control of the situation was likely the shared impulse which led to record site traffic and its concurrent crash.

As an advisor at Balentine, I have often felt possessing a degree in psychology would have been far more useful than my degrees in economics and finance.

Investing is inherently emotional, and my role is largely to help clients prevent their biases, whether logical or illogical, from clouding their vision.

All Balentine clients are intelligent and accomplished, and many of them have led businesses through trying times with successful outcomes. They are masters of their craft, instinctual by nature, and are used to making tough decisions, oftentimes by gut feel.

For myriad reasons, many smart, successful people have chosen the DIY route. And in many instances, they have achieved desired outcomes. The problem is that during times like these, hunches and emotional decision-making regarding investments can derail investors from reaching their long-term financial goals and objectives. In some cases, it can lead to permanent impairment of capital since “lost” capital only becomes so when losses are realized. Furthermore, the hidden costs associated with wading into choppy waters can zap any potential benefit from making the right short-term call. Bid/ask spreads tend to widen, market dislocations can lead to illiquidity, trading costs can pile up, and tax implications can be disadvantageous if not considered beforehand.

Even the savviest investors can fall victim to the emotional moment. Whether it be requests to trim risk-managed equity exposure, to sell bonds which serve as an important ballast amid market volatility, or to retain concentrated positions (particularly within energy and financials) which may never again present such opportunity to be diversified, investors often seek action at the expense of logic when markets go haywire. One of the aspects I love most about my role is helping clients, many times through raw conversations when times get tough, reach a sensible outcome which adheres to his or her financial plan while acknowledging the justified fear and dismay which is tempting them to veer off course.

Suggesting that a client hold tight in the current environment is not due to a lack of empathy or understanding regarding the severity of the coronavirus both from a humanitarian and economic standpoint. And it is not because Balentine’s crystal ball is more clairvoyant than anyone else’s. The truth is nobody can perfectly forecast the pandemic’s effects on our healthcare system and the multitude of industries directly in its path. Balentine’s conviction stems from a model-driven investment process we have been honing for more than 20 years, which allows us to remove emotion from the equation by allowing data to affirm our suspicions before acting. It also stems from the collective wisdom and stability of our investment team, the majority of whom have been working together for decades. Lastly, it stems from our track record of tactically positioning portfolios in and out of risk when storms surface and eventually dissipate, providing clients with the assurance that we can and will make tough decisions on their behalf.

Make no mistake, DIY investing is not going away, as there will always be some who can handle the vicissitudes of the markets without ceding to behavioral impulse. As competition ramps up and costs come down, the lure of DIY platforms will continue to attract customers. But for many, the coronavirus crash of 2020 is their first real test, and they shouldn’t feel ashamed if they find themselves questioning whether they have the mettle to navigate a cavalcade of depressing headlines, wild market swings and an uncertain future.

After all, as I have learned over the years, the easiest day to invest was yesterday and the toughest day to invest is tomorrow, which is why having an advisor serve as an emotional circuit breaker can lead to optimal outcomes during volatile times.

Our clients turn to us since Balentine has a deep bench of professionals with experience navigating tumultuous times, and we have the advantage of turning to one another and leaning into the strength of the pack. If you are a DIY investor and find yourself needing a sounding board, I encourage you to turn to someone you can trust who has the requisite experience and wisdom gained over many market cycles.

Sitting in my home office looking out at the briskly blooming dogwoods and dandelions, I am reminded that spring brings new life and a resurgence from darker days. While no one can say for sure when the coronavirus pandemic will pass, it eventually will. The same holds true for clients who resist the urge to act during times of duress without proper guidance. A portfolio is an asset like any other in the sense that if you treat it properly, invest in its upkeep, and allow it to maintain its integrity, it, like spring, will come back to life again.