Learning from mistakes
One financial planner is reported to have told his clients following the 2008 market crash, “You have to remember, all boats sink some in a falling tide.” The couple had just gotten the news that 40 percent of their life savings had been virtually wiped out overnight. Money counted on for retirement was now blowing in the wind like a dandelion poof. The reverse side of the axiom was then uttered, “And when the tide rises, all boats rise with it.”
Please keep in mind that these folks were on the verge of retirement. They could not afford the loss of that much of their life savings at so critical a time in their lives. That one-liner about tides and boats is both insensitive and untruthful. It is tantamount to a surgeon losing a patient on the operating table and shrugging to the grieving family, “Well, you win some, and you lose some.”
I am not in the medical field, so I cannot speak to what should and shouldn’t be done in the operating room. But as a trained financial planner, I can tell you that the advisor could have taken measures that would have prevented the couple’s loss.
I live two hours from the Atlantic Ocean, and I know a little about boats and tides. The falling/rising tide illustration the broker used to explain away the sudden loss of the couple’s money is clever, but it just doesn’t wash. It suggests that we should just accept the rising and falling of an economic tide as something that occurs every few hours and can do no lasting harm. It is as if to say, “Oh sure, you lose a little when the tide goes out; but you gain it all back when the tide comes back in.” That wasn’t the case here. The loss experienced by these people was not usual and customary. It was devastating and preventable. Fitting that kind of loss into a falling/rising tide scenario would require the ocean to leave the harbor entirely, expose the ocean bed for miles, and then come back in at the rate of a few feet per day.
At the coast, there are boatyards that are used as dry docks when a hurricane threatens to come ashore. These areas are largely empty of boats until a major storm is predicted. Until then, boat owners leave their vessels bobbing peacefully in the harbors and marinas for convenience. However, once the storm surge is predicted, the dry docks fill up fast. Huge cranes hoist heavy boats out of the water and place them on blocks. Forklifts move smaller boats to warehouses where they are stored indoors until the storm passes. Owners who fail to take such precautions may have their boats severely damaged by the storm, or perhaps lose their boats altogether — all because of either inattention or poor decision-making. So it’s not true that what happens to one boat has to happen to them all. Likewise, money can be protected from loss by making the right decisions as to its placement and use.
There’s an old proverb that makes a great deal of sense: “Smart people learn from their mistakes; geniuses learn from the mistakes of others.” Wise financial planners know how to position the assets of those nearing retirement so that they do not experience unacceptable losses. To knowledgeable and competent financial advisors who are trained in retirement planning, the very idea of you losing your retirement savings because of the volatility of the stock market is patently unacceptable.
Staying above “C” level
My father, who was a college professor down at UNC-Pembroke, was an exacting man when it came to the academic performance of his children. “You want to know why people drown?” he used to say. “Because they didn’t stay above ‘C’ level.”
If any of the D’Arruda boys came into the house with a “C” on their report card, it was not going to be a pleasant evening. I had two brothers — one was two years younger and the other was four years younger than me. On the rare occasions when one of us did bring home a “C”, we quickly learned that there were no excuses that would fly. We knew never to use the excuse, “But everyone else got a C, too.” There were a string of reasons my father used to invalidate that theory. We were quickly informed it was ridiculous to think that our test results and grades were inevitably bound to equal those of our schoolmates. My favorite line of his was what I later dubbed the “lemming rebuttal.”
Lemmings have had the reputation for going off cliffs in droves ever since they were portrayed doing so in the 1955 Disney film, White Wilderness. “Is your last name Lemming?” he would ask. “If everybody else jumped off a cliff, would you do it, too?” The point did sink in that just because everyone makes a mistake, that doesn’t condemn you to imitating it. There was no definition for it in those days, but today, we call it “tough love.” My father was exacting because his standards for us were high. I learned to simply study my lessons and do my homework. That way, I was never surprised by a pop quiz or a hard test. I knew the material going in. Study hard and do your work, and the grades will take care of themselves.
Being caught on the wrong end of a stock market downturn simply means that we were not proactive enough with the handling of our monetary affairs. There’s no way of getting around the pure and simple truth that we made a poor decision, even if it was deciding not to decide. Being proactive in a financial sense simply means positioning yourself in such a way that you can’t be hurt. The secret of success in this regard involves the dividing of our money into different strategies, or different buckets, so that in case we happen to make a bad decision, it only affects some of the money. The rest of the money is invested where it is safe from loss, so we stay well above “C” level.
Coach Pete and his team offer complimentary retirement strategy sessions to Chapelboro readers. Contact them at 919-657-4201.