The conversation starts something like this:
“I heard someone say ________ is going to happen to the stock market and I should do _______ to protect myself.”
These are two distinct statements. One is a prediction, the other a prescription. Let’s talk about both sides and why big down days for the stock market are opportunistic for some financial professionals looking for a career maker and dangerous for you.
Making a “career maker” prediction
First, a person who makes a living making predictions about the stock market knows only one thing for certain: All they have to do is be right one time. Go on CNBC or write your end-of-days blog with a specific prediction at just the right time and you will forever be “The Man Who Called the Crash” or “The Woman Who Predicted the Plunge.” It’s a career maker. Now, they likely have been calling for this plunge since Dow 12,000 but that’s beside the point. It is worth being a Cassandra for a decade because the payoff is rich in notoriety.
When you hear or read a prediction it is worth considering the source. Are they a stopped clock, citing the same narrative over and over (usually having something to do with the Federal Reserve), or do they have enough nuance to change their mind based on new events and circumstances? There are many thoughtful writers and speakers on the topic of investing, but they are often paired in interviews as conversational counterweights to the Career Maker crowd. It makes it hard to know who to trust. For a funny visual, I love this chart that shows just how frequently and fanatically wrong the predictors can be:
Saying “What” will happen with any confidence is impossible. Asking “What” will leave you with a litany of statements about the things that did occur or could occur. You can keep reciting the same facts without changing your tune.
asking the right question
The more valuable insights come from people who ask “Why?”
- Why is the stock market volatile?
- Why is the Federal Reserve lowering interest rates?
- Why is the global economy slowing?
- Why does any of this matter to you?
“Why” is hard. It takes rigor, analysis, and humility to appreciate how connected all of the facts are. While we don’t always have time for these more in-depth questions, it is ok to just turn off the television and tune out the Career Makers. Don’t worry, they will still be there when you turn it back on. You can read some articles that explore “Why” musings on our blog.
The second part of this conversation that I hear is about protecting ourselves from all this volatility. Just as the financial media is aligned to bring you predictions, Wall Street stands ready to sell you protection when you are at your most vulnerable. If the phone rings from your broker and there is a product being pitched on days like last Friday, hang up. Feeding off of our fear is a business model for some and it doesn’t always turn out as planned.
An August 23rd, 2019 article in the Wall Street Journal told of how UBS, the large brokerage house, is being sued by a group of clients over an investment strategy that was pitched by its’ brokers as low volatility. It was called the Yield Enhancement Strategy or YES (who doesn’t want their yield enhanced?). It was billed as safe and sold to investors who had no idea what they were getting into. What it actually involved was options trading, leverage, and the kinds of risk that a retail investor doesn’t understand. Neither does the broker selling it.
The article cites one client who had little investment experience but was convinced to put $3 million into this ‘safe’ strategy by her broker. She lost $750,000 when the trade fell apart last year.
Ms. Pellini, 60 years old, and several other UBS clients said their brokers told them the investment strategy had a lengthy and solid record. Ms. Pellini said her broker… told her the strategy had a 17-year history of no losses. “He said: ‘If the world came to an end tomorrow, you’d be the only one with any money left,’” Ms. Pellini recalled.*
They know we want it all: Safety, and returns, and income, and tax efficiency, and we want to feel like we are in on something special, too. So the wizards get to work behind the curtain packaging all this stuff up, then they weaponize it by putting it in the hands of their salespeople and tell them to get to work on the product of the day. Don’t buy it.
Here’s the bottom line: We all need to toughen up when the markets are down. The voices will tell us it’s all falling apart because that captures valuable eyeballs. Then the brokers will start dialing us with all of the ways to stay safe. You know the truth, though. No one can predict the future. We should never invest in something out of fear. We can’t have it all, there are always trade-offs. Some people will try to make a career out of market drops, but you are stronger than they are.
*“UBS Faces Client Backlash Over Options Strategy.” The Wall Street Journal. 8/23/2019