Sunday Email - Managing through unsettling times

Read time: ~ 5.30 minutes

Happy Sunday!

Every Sunday I offer strategies for the week ahead and a thought to fuel your action.

The markets were up 3.5% for the year, following a nearly 30% gain the previous year.

The good times were rolling.

It was an election year, which historically tends to bode well for markets. However, political headlines were starting to stir, though the market's highs made these feel less impactful.

Despite some odd things beginning to occur, we continued to feel safe.

In Yokohama port, Japan, a cruise ship was quarantined due to a newly recognized disease called COVID-19.

There were growing concerns about this disease making its way to the United States, having already caused more deaths globally than SARS in 2003. Things were starting to shift.

Things were starting to shift.

Just like that, the markets turned from a good start into a disastrous decline.

In two weeks, the S&P 500 fell 12.6%. Within another three weeks, it dropped another nearly 22%.

This story is not too unfamiliar. It’s recent and is still very fresh in many minds.

It’s also the story I tend to use during presentations to help people understand the challenges clients face when the market becomes difficult.

The story goes through a hypothetical client's journey from June 2019 through December 2020.

From June until mid-February, our hypothetical client was satisfied. They were able to focus on living their lives, felt comforted, and felt that they were succeeding.

When health and relationships are stable in daily life, clients can reason with logic—just like this client. They agreed to the changes recommended by their advisory team.

Things changed dramatically in February.

Yes, the world was ultimately shut down, and a pandemic has ensued, unlike in our lifetime. But our client's tone of rational thinking and understanding shifted between February 10th and February 24th.

As the market fell, their brains perceived this financial loss as a threat. The HPA Axis (hypothalamic-pituitary-adrenal) was activated, releasing stress hormones cortisol and adrenaline. This ignited the fight-or-flight mentality, which also occurs in other areas of our lives.

As the market decline continued, the amygdala was activated, spurring fear, worry, and anxiety. The prefrontal cortex, responsible for executive functioning and logic, became impaired due to stress and elevated cortisol levels.

By March, our hypothetical client felt helpless. The complexity of the market, the economy, and the global pandemic was overwhelming. They felt out of control and sought a way to regain it. The stress and cognitive load led them to rely on shortcuts and past experiences, making suboptimal decisions.

They use the availability bias, which means they rely on the most accessible and most readily available information. Then they act. Or they look for information that confirms their current feelings (stress, fear, worry).

Ultimately, the client can’t take it. They make a decision, and it is based on the shortcuts that allow for an answer in stressful times or via impaired risk assessment. They look to gain control.

Ultimately, this hypothetical client calls for you to sell everything on March 16, 2020.

Despite the market turn, they are unable to get back in until much later in the year. They want comfort, and they find that in the control of cash.

By taking action, we are trying to control the future. Yet, as we sit here in a logical state of mind, we know that no matter what we do, our ability to control the future is impossible.

The future is determined by so many unknowns that even if one takes the best-perceived action or executes the perceived perfect process, the outcome may not be optimal.

There is that individual who lives a reckless life of danger, drinking, smoking, and lack of attention to health, yet they live to be 100. And then you have the conscious, healthy, good-shape individual who lives to 55.

Outcomes are independent of process. And thus, we only control the moment we are in.

We all want to control the outcomes. We all desire specific outcomes and have strong desires to reach them. Thus, we find comfort in controlling what we can. And action (whether optimal or not) is our way of controlling our future.

This is why a human financial advisor is so valuable, and our jobs as financial advisors need to continue to expand well beyond investment selection and asset allocation.

Our purpose is far greater than the actions and skills that were the focus of our profession 20 years ago.

Our nervous hypothetical client from above would have benefitted from talking with someone. Whether it be a therapist or an advisor, they would benefit from talking to someone.

Talking with another human and having them listen and understand your feelings and emotions reduces stress. This listening reassures individuals that their feelings are normal and manageable.

Conversing with another person also releases oxytocin, which promotes feelings of trust and safety. Given that the client was dealing with the negative impacts of cortisol, this release of oxytocin counteracted those effects.

Engaging in meaningful conversations and receiving guidance activates the prefrontal cortex. This counteracts the dominance of the amygdala that ensues during periods of stress, fear, and worry.

Finally, there is truth that venting helps. It helps the person venting process and organizes their thoughts. It relieves the burden of some of the stressors.

It is integral for the advisor to be present for a conversation and to be able to listen, actively listen, and understand the client.

It’s essential that we connect with the clients emotionally and then lead them. But not with logic; lead with clear, concise, and direct steps to move forward.

It’s a concept of pacing and leading. Pacing means that we connect on their emotional level. It leads to empathy and understanding. Once this has occurred, we can lead. But it’s not leading by saying they are wrong; rather, it’s leading with clarity and conciseness.

An example of this happened with two passengers near me on a plane recently. They were engaged in conversation from the beginning. They were a man and a lady. The lady wasn’t a fan of flying, but the man was a consistent traveler.

They conversed for the entire flight. Once at our destination, the lady became very nervous. She had revealed to the man that she was clostrophobic and was about to freak out. The gentleman, at first, was shocked, but then he helped.

The lady was about to yell despite being on the ground and about to deplane. The man, in a calm voice, presented her with a plan to tap the person right in front of them and ask to get in front because of a medical emergency. Do that all the way to the front, and she will deplane.

The lady did this: She focused on the specific task at hand and was able to navigate away from her fear and potential irrational reaction of screaming on a plane.

Clear, concise, direct action steps help to move individuals from a state of irrationality to action.

Logic does not resonate when someone is in a state of irrational or overreacting behavior. Arguing to try to change the individual leads to heightened irrationality, not lessened.

Finally, we know that in periods of stress, we revert to shortcuts and biases. Many of these actions stem from past experiences and learned behaviors, which is why it is so important to understand our clients beyond surface-level, traditional financial information.

Understanding their upbringing and the home environment they grew up in, their experiences with money, and their parents' experiences with money. It’s about understanding how their parents earned money and their current clients' interactions with that. We must know both of our clients, not just one spouse, because ultimately, they are both driving decisions.

Understanding at this depth feels uncomfortable and may cross the line of therapy. But in reality, it’s the only way we can help navigate our circumstances in times of stress.

In my presentations, the hypothetical client is referred to as nervous Nelly. I compare nervous Nelly, who invested $100K in June 2019, to support system Sally, who invested the same amount at the same time. The difference is that nervous Nelly acts on her emotions as she navigates them all alone, while with a support system, Sally has a person to talk with.

At the end of 2020, Nervous Nellie’s $100K investment is now worth $86,500, and Support System Sally’s investment is worth $130,000.

In this example, emotions caused a near $45K difference in value.

This is why advisors should never lower their fees. Their value lies in understanding their clients at the deepest levels and being that sounding board to navigate them through the psychological challenges that come with fear and financial volatility.

A Thought To Ponder This Week

Growth is the name of the game.

Whether it be in business or life, we are all looking to grow.

When I consider growth, I compare it to building Legos. Each conversation, article, book, and experience is another Lego block.

And some people love to try to build the tallest lego tower in as quick of a time as possible. This leads to building a tower straight up with a small base. This is a tall tower, but a bit wobbly.

Others opt to build a solid base, and depending on how many Legos they have, they don’t build as tall a tower, but it is sturdy.

In life and business, those who are constantly curious are consistently acquiring new Lego blocks.

When I look at those who are successful, they have unlimited Lego blocks. This allows them to build a strong base in their tower and then add on to grow the tower.

The key for these individuals is that no matter how big their tower gets, how far up the ranks they go, or how successful they become, they are constantly asking questions.

They never assume they know the answers. They always know that they don’t know it all.

A great question is a sign of an intelligent individual. One who assumes nothing, looks to connect deeply with their counterpart, and is constantly curious, even if they may know the answer.

A question connects individuals deeper than an assumption.

So, as we head into this week, try to ask one more question than you think is necessary when talking with a prospect or a client. It may just be the key to their thinking, allowing you to serve them deeper.

The best is ahead!

-Matt