If you’ve been in the investment business for 40 years, you’ve seen it all: Incredible bull markets and vicious bear markets. Periods of high inflation, low inflation. High unemployment, low employment. Housing booms and busts, a fed-funds rate of 20% (really) and 0.25%. Wars, recessions, bailouts, scandals, Democrats in control, Republicans in control—you get the picture.
So whenever you run into someone who has been advising investment clients that long, through all that turmoil, stop what you’re doing and listen to what they have to say.
Which brings us to Gary Fournier, managing director and financial adviser at J.P. Morgan Securities, a wealth management division of J.P. Morgan JPM, -0.95% Los Angeles-based-Fournier, manages more than $900 million for his clients, and says that guiding investors through all the market and economic cycles he’s seen comes down to one key, critical thing: “Managing risk.”
Risk is everywhere. Stuffing your cash under the mattress is risky; there’s no return and inflation will erode its value. Inflation, and changing interest rates, can also erode principal in so-called “risk-free” Treasury bonds. Risk is all around, and if you’re a retiree or soon-to-be retiree, it’s a heightened danger, because you have less time to make up for losses if something goes wrong.
Having unrealistic expectations is also a risk. Fournier offers an example, a client who wanted a 10% return on his/her investment portfolio—with half of the portfolio in bonds. The math is daunting: “If the five-year bond is yielding 2% and 50% of the portfolio is in bonds, that equates to a one-point return,” he points out.
So if half the portfolio is generating just one-tenth of what the client wants, the other nine-tenths would have to come from the other half. That means upping the risk. “The other half of the portfolio would have to generate an 18% return,” Fournier points out. “And what’s the probability of an 18% return on a continuous basis? That’s hard to do,” he says. “Even the stock market (historically) doesn’t return 10% very often.” It certainly hasn’t this year: as of this writing, the S&P 500 SPX, -0.19% is off some 6% in 2018.
Thus when a client has an expectation that’s probably not feasible, Fournier sits down with them and guides them through the numbers; this typically leads to an adjustment of those expectations.
The market’s cooling off is a reminder that you can’t assume that equities will do well in the future just because they have in the past.
In fact, this may be one of the biggest dangers that you’ve never heard of: “recency bias.” Recency bias is when folks look at how an asset class has performed recently and use that data to make assumptions about how it will perform in the future. This can be a recipe for trouble. Why do you think investment firms always warn that “Past performance is not an indicator of future results?” Because it’s not.
Speaking of recency bias, anyone who thinks that stocks can replicate their performance since March 2009—when the S&P began a 300% run that lasted, apparently, through late 2017—may want to think again.
Vanguard, the world’s second-largest asset management firm, says U.S. stocks will return about 4% annually through 2026, while non-U.S. equities will return about 6.5% and global fixed income should return about 2.5%. Charles Schwab Investment Advisory SCHW, +0.12% expects a 6.7% nominal return from U.S. large-cap stocks and 3.1% from U.S. investment-grade bonds. But other forecasts are less cheerful: Morningstar Investment Management predicts nominal returns of just 1.8% for stocks and 2.5% for bonds.
As the markets downshift, this is where Fournier’s laserlike focus on managing risk can pay off. While no two investors are ever the same—age, goals, and tolerance for risk can vary significantly—all are given some fundamental: Keep your expectations in check, stick to your plan and remain calm.
“The key is to be able to weather through a decline,” he says. “Historically if you’ve been able to stay in place, the markets return for you. And the people that panic out are the people that lose the money.”