Do you have any thoughts on what caused the recession and the subsequent economic collapse in the fall of 2008?
First of all, it’s important to remember that the stock market high was in October 2007, a full year before the crash. Was the housing market unsustainable? Yes. Oil prices passed through 120 dollars per barrel, it was the first predictor and we sold our clients out of oil. That said, from our point of view and our clients’ point of view, how it happened is irrelevant. What’s relevant is how we dealt with the situation.
So, how did you deal with it? You had clients who were already retired and those who were about to retire who had little chance to earn back what they lost.
We had to become psychologists. Our job was to remind our clients not to panic, don’t stock up on guns and food, and to reassure them that everything would be alright. The fear and uncertainty really intensified in January and February (of ’09), then the market low was in March. In early 2009, we were preaching you can’t panic, you can’t sell and you haven’t lost any money until you do sell. That message worked but after four or five months it was hard to endure, particularly because all the “advisors” online and on the TV news were saying, ‘Get out now.’
How did your clients react? Did many instruct you to “get out” of the market or did most ride it out?
We had a few sellers but anybody who rode it out was better off. In the first quarter of 2009 there was a 25 percent drop in the S&P, we called that “panic selling.”
It’s been five years more or less since the market crashed. What are the lessons from that time that still resonate today?
When we talk to people, we always talk about risk, but the conversation tends to be abstract. The crash of 2008 made people realize that risk was real. The memory fades over time, but it was a real reminder that risk is not an abstraction and a demonstration of what might happen if the market dropped 40% again. We tell clients that we will see another drop and when we do, we have a plan for it.
I’m sure many Assets reader would like to know how you plan for a 40% drop. What are you telling your clients?
We have our clients hold bonds as a safety net. If they need cash, we draw from bonds, not stocks. They don’t have to start firing their employees.
What happened in ’08 and ’09 solidified our beliefs at the 20,000-foot level. At the 5,000-foot level, we made adjustments. We constantly ask ourselves “where do the risks lie.” If interest rates go up, bonds will go down. In ’08, that was not a concern, but it might be now.
We also believe in promoting sustainability. Abacus has a fund with Dimensional Fund Advisors; the fund over-weights sustainability. We still buy oil, but if Exxon is doing things that are more sustainable than British Petroleum, then we buy Exxon because we believe that companies focused on sustainability will do better over time.
There are two things we deal with when it comes to our clients. The first is that two to three times per year we’ll experience the apocalypse du jour. It was the fiscal cliff last year and if you gave in (and sold stocks) you missed out on 30% returns. We try to discount that effect. Our clients understand that we will have a meaningful drop, so prepare yourself now.
The other thing we deal with is risk tolerance. It really changed for some. People have to continue to remember what happened (in the recession). It’s easy to forget, but it will happen again. X