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Stan's World - Acting Against Instinct

Submitted by S. F. Ehrlich Associates, Inc. on October 6th, 2020
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September 30, 2020

A few weeks ago, we moved my 98-year-old mother from independent living to long-term care. One of the reasons why we selected the community where she lives is because they have a continuum of care, to include independent living, assisted living, and skilled nursing.

(As an aside, for anyone considering independent living, a continuum of care on the same campus is beneficial for many reasons. Call me if you’re interested in getting more information on this topic; I’m happy to share all that I have learned over the years.)

Despite my mother’s age, the decision to relocate her was admittedly difficult for me. Similarly, I’m sure it has been equally difficult for so many of you who have had to do something similar with an elderly parent or relative. Conflicted as to whether my mother could continue to stay in her own apartment with home care aides vs. moving her to skilled nursing led me to ask one of the nurse practitioners, who knows my mom well, if we were doing the right thing. After explaining all the reasons why my mother required more care than she could receive in her own apartment, she concluded by saying: “Your mother knows what she wants, but she doesn’t know what she needs.” That remark impacted me on two fronts.

First, it clarified that the decision to move my mother was the correct one and that it obviously couldn’t be left for my mother to decide. My brother and I had to make that call in our mother’s best interest.

Second, the remark resonates with me because it also relates to what we do for our clients. In fact, there are times when what a client wants directly conflicts with what we think a client needs. When that happens, it poses an interesting dilemma: How to maintain an ongoing relationship when the advisor and client’s viewpoints don’t align? 

Because we try to manage client portfolios without emotion, dramatic market moves, as we’ve seen in 2020 (and 2008-09, 2000-2001…), minimally impact our portfolio management strategy. In fact, significant market downturns offer two opportunities, neither of which involves sheltering cash and seeking safety: (1) The opportunity to rebalance a portfolio, which is that old buy low and sell high thing that everyone loves to talk about but finds so difficult to actually do; and (2) The chance to sell assets that have substantially gone down in value and book losses that can be used to offset taxes. (Regarding the latter, as many clients already know, this is a strategy that entails selling an investment in a taxable account that has dropped in value and buying another investment that offers comparable exposure to the same or a similar asset class. Booking a loss on the investment that dropped in value can be used by the client in the current or future tax year to reduce his/her tax obligations. Let’s just say that most accountants appreciate this tactic.)

Research1,2 shows that both of these actions are likely exactly what clients need (but may not necessarily want) at that moment in time. When the stock market goes into free fall, it’s logical to seek safety. It’s rational behavior to want to stop the losses, and to move to the sidelines until things stabilize. Unfortunately, acting on those instincts may negatively impact the probability that a client’s financial plan will be successful over the balance of his/her/their lifetime.

When you spend your whole life earning and saving money, the decision to stay invested in the stock market, or even to buy more equities, may not be what you want. But even in the midst of a market meltdown, it’s probably exactly what you need.

 

 

 

1 “Putting a Value on Your Value: Quantifying Advisor's Alpha.” Vanguard, 19 Aug. 2019.
2 Daryanani, Gobind. “Opportunistic Rebalancing: A New Paradigm for Wealth Managers.” Journal of Financial Planning, Jan. 2008.
 
 
Please remember that past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by S.F. Ehrlich Associates, Inc. (“SFEA”), or any non-investment related content, made reference to directly or indirectly in this newsletter will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.  Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this newsletter serves as the receipt of, or as a substitute for, personalized investment advice from SFEA.  To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing.  SFEA is neither a law firm nor a certified public accounting firm and no portion of the newsletter content should be construed as legal or accounting advice.  A copy of SFEA’s current written disclosure Brochure discussing our advisory services and fees is available upon request. If you are a SFEA client, please remember to contact SFEA, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing, evaluating, or revising our previous recommendations and/or services.
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