“These are the times that try men’s souls,” says Alan McKnight, chief investment officer at Regions Bank, quoting from the well-known collection of articles, “The American Crisis,” written by Thomas Paine back in 1776.
McKnight, a history buff, and other wealth managers at the state’s banks are finding these times trying and are spending a lot of time trying to figure out what to tell nervous investors as the Covid-19 crisis causes widespread fear and economic chaos around the world.
According to a report from consulting firm PwC, asset managers have seen extraordinary volatility in the stock market, spreading concern that further downturns may happen. Some money managers say volatility is a reference to investor nervousness and is a problem, but others say volatility could signal a resurgence in the market.
Investing in this market “is like predicting what is coming over the horizon,” says Robert Brooks, a professor of financial management at the University of Alabama in Tuscaloosa and president of consulting firm Financial Risk Management LLC. “It would have been nice for the Titanic to have had some binoculars in the crow’s nest, and the fact that they didn’t is a problem. But that is not why the Titanic sank; it sank because it was not built right.
“There is a phrase that I like very much and that is, ‘The main things are the plain things.’ The main thing investors should be focused on is their own family’s financial ship. If you have no debt, you probably are at a much lower stress level than if you were buried in debt,” Brooks says.
“Complexity has definitely been ratcheted up, and then you have times like these that puts it on steroids,” McKnight says. “What we do know is that, over history, you have these bouts of volatility and risk and to get through them, keeping calm and carrying on is the best approach.”
McKnight says that, as of May, stocks are down across the board, “so it doesn’t matter if it was large cap domestic or small cap or international, all in tandem they went down as we hit the low back in March. Now we also have seen a resurgence. We had the Dickens ‘Best of times, worst of times,’ and now we are seeing the market in a resurgence and actually, on a year after year basis, the S&P 500 is actually flat.”
That means, according to McKnight, that if an investor put $1,000 in the S&P at this time last year, they would still have that $1,000 today. “As much as we have experienced that up and down, we are actually point to point in the same spot,” he says.
“And the amount in a portfolio really differs on a person-to-person basis,” he says. “We are all facing the same storm, but we are in different boats. I think that is true, because each person has a different tolerance for risk.”
“Risk preferences to me have always been sort of nonsensical,” Brooks says. “Would you like high average returns if every now and then you lose 30 to 40 percent? Most people would say ‘Sure,’ until they lose 30-40 percent, and then they say ‘I don’t really care for this.’”
The wealth managers say some investors have taken a portion of their risk off the table by converting a portion of their portfolio into cash and some have moved to an all-cash position with the intent of moving back into the market via dollar-cost averaging.
The degree of loss varies greatly from client to client based on specific situations, the wealth managers say.
Generally speaking, investors who put all their financial eggs in one basket or who were frightened into selling have suffered the greatest losses, says one wealth manager, and the Covid-19 pandemic has created more turmoil in the market than most investors have ever seen.
“That is precisely why PNC’s wealth management team works directly with every client to create a solid financial plan with specific parameters tailored to each client to help guide them at times like these,” says Grey Yeager, senior vice president and asset management group market leader at PNC Wealth Management.
McKnight says the bond portfolios have done exceptionally well over this time period “and the aggregate bond index is actually up 10 percent on a one-year basis. So what that tells us is that bonds have a place in a portfolio, specifically as a ballast, if you will, during the storm to ensure that, one, you don’t lose money, coupled with the ability to actually generate income and maintain some risk adjustment versus your stocks.”
But the stock market is what the everyday investor is worried about, and the stock market has seen daily significant swings. Certain sectors in the market have experienced greater volatility than others. Leisure and entertainment companies are good examples, as well as financial and energy stocks.
McKnight acknowledges that investors he deals with are understandably alarmed at the impact of Covid-19 on their finances.
But he adds, “If you look back over history, typically we have situations like this. We have these big market selloffs and economic uncertainty and you have some kind of bubble. You had the housing bubble, the technology bubble, you had the Russian and Asian debt crises. Humans are pretty consistent in that way. We over-price something and it goes too far and it gets popped. What we don’t have experience with is a pandemic. I think that is what gets people so nervous. It gets awfully hard to know what to do,” he says, adding that investors also worry because “it is not easy to flip a switch to get people back to work and off furlough.”
The degree of uneasiness varies from client to client, depending in many cases on the degree of financial knowledge and how mentally prepared clients are for risk. This is when advisors earn their pay.
“Your ability to ignore day-to-day events is linked directly to how much you are spending relative to your earning. We call it yearning to earning. Your financial life is always very straightforward if your earning exceeds your yearning,” Brooks says.
“The key is not to panic,” says McKnight. “Focus on what you can control as an investor, and it comes back to having a plan. Create a plan and you stick to it. It doesn’t mean there will not be some changes along the way, but if you do that well, you can arrive at your goal.”
According to Brooks, “From a very practical point of view, investors should be needs-driven. Figure out what your family needs are and build a portfolio based on those needs, as opposed to trying to figure out what is coming over the investors’ horizon and moving back and forth based on what you think is coming.”
Like many banks, PNC and Regions provide clients with customized goal-based investment plans that emphasize a long-term mindset, a disciplined approach to portfolio management to avoid emotional decisions and, where practical, controlled spending.
“It is at times like this that we feel our team adds the most value to our clients,” says PNC’s Yeager, “because we manage emotions more than money. It is very rewarding when we check in with our clients and they tell us we prepared them for times like this and we are sticking to the plan and guidance you gave us.”
Most wealth managers agree that it is easy to understand why such a tumultuous market has investors scared and frustrated as they watch their earnings erode.
“Finance is a lot like diet and exercise,” says Brooks. “People need a gym coach in their face yelling at them. The role of a wealth manager, if they earn their keep, if they do it right, in the sense that they keep you accountable, they help chart a course for your family, and they help keep you on course.”
Yeager agrees. “Sometimes the most important choice you can make is who you trust to walk along with you on the journey,” he says. “At PNC, we pride ourselves on educating our clients and making strategic, disciplined recommendations and that makes us a valuable resource to our clients.”
And there are different types of investors to deal with.
“You have people who are bottom feeders when things were bad, and you have other folks at that exact same time who all they wanted to do was sell everything in their portfolio, because they couldn’t sleep at night,” says McKnight. “And depending on where you are from a stage of life perspective, what your savings are, what your comfort level is with risk and then how much cash flow do you need, the proportion of bonds versus stocks is really going to vary. And that is what we try to do in building a portfolio is try to understand what the needs are for each client to ensure that you don’t lose sleep at night.
“There have been challenges, but if you have a plan going into it, and you have a path, you weather that storm much better in those crises.”
“I like the idea of investing with purpose,” says Brooks. “When I have years to go, I can take an enormous amount of risk. I can take small cap funds or whatever in pursuit of a higher risk premium.
“But,” he says, “the day will come when you will realize you are not coherent enough to manage your portfolio, so I would encourage people that sooner rather than later to figure out who is going to run the portfolio for them.”
McKnight says he spends most of his day talking to clients, doing research and writing portfolios.
“I think the most important thing for me is not so much what has happened, looking in the rear view mirror, but more importantly looking out the front windshield to see what we forecast on the horizon. What should we do with client portfolios to ensure they meet their goals? In many cases that is not worrying so much about whether the market was up or down yesterday or the day before or today, but it is much more of long-term perspective and the belief that if you get that right that you will have much higher probability of success” he says.
Regions also has a team of people who talk to the various companies across all the different industries and sectors to understand what is going on, about their status and what they are doing about the emergency plans.
“What we have heard so far is that companies are pulling their forecasts,” McKnight says, “because it is really hard for them to have a whole lot of visibility on what clients are going to be doing, how they are going to be spending, and on the corporate level, business to business, companies are not really sure what to expect. And they have been either cutting share buy backs or reducing dividends where needed to ensure the long-term viability of the enterprise.
“Some are hit much harder. You have the winners and the losers. The winners are those industries and companies that are able to get through this, and yes, they are taking a short term hit. And if you are in the technology world, where everyone is working remotely, or you are in healthcare and people are trying to figure out a vaccine, or if you are in biotechnology, you are doing pretty well this year. The winners are really the ones that we are talking to even more, to understand what is their plan and how do they see a path forward.”
Most wealth managers these days suggest strategies that take the emotion out of investing. One strategy that PNC implemented for certain clients is to take one to two years of living expenses out of harm’s way, so those clients will be more confident that the downturn will not affect their standard of living in the short term.
Says Brooks: “If you had a three-month emergency fund, as any rational human being knows they ought to have, you really are not that stressed out. But if you have a first and second mortgage, car payments, student loans, credit card debt and no emergency fund, that’s a problem.”
And McKnight also has a “this too shall pass” approach.
“We do this every 50 to 100 years,” he says. “We don’t necessarily have a lot of experiences with something like this, other than the Spanish flu, that is this bad and is this global.”
“In my class, I plot overall market returns every decade from 1925,” Brooks says, adding that every decade has a period in which the market was down from 20 to 40 percent. “In 1929, the market was down 80 percent from peak to trough, but over that decade I think it was up 50 percent.”
“It is the old adage,” says McKnight. “The stairs take the market up and the elevator takes it down. It is the same way with hiring. Companies are going to be a little more hesitant to immediately bring people back, until they have a forecast of what to expect. Until they do, if I am the CEO of a company, I am going to go a little slower and be safe. And I think that is where, from an economic perspective, we hear a lot of concern around how long is it going to take for us to get back close to something normal.”
Bill Gerdes and Art Meripol are freelance contributors to Business Alabama. Both are based in the Birmingham area.