The second part of my interview with Nick Lincoln, originally broadcast as part of season 14 of the MeaningfulMoney podcast, when we looked at New Accumulators in mid-2019.
PM: I know that helping people to understand risk a passion of yours, and it’s one of mine as well. I feel like we need to bang this drum even more, and you and I both have a platform that we can do that, both with our clients and our respective podcasts, which I’m going to bring up later.
One of the messages you get, and it again, even the teaching of advisers is that ‘people in retirement can’t make back any losses’, but that’s just the same thing again, isn’t it? It’s not really losses!
NL: Exactly. Whether you’re eight or 80 years old, you only incur permanent loss if you capitulate to, and forgive my phrasing here, the financial pornography that accompanies every catastrophe.
Permanent loss is only incurred when you sell, and it’s nothing to do with age. The reason why it can become more of an issue in retirement is because people in retirement will be living off their investment portfolios and drawing down on them to fund their lifestyle.
In a 30-year retirement, you can probably count on five or six times when the market will suffer a decline of 20% or more. What you don’t want to be doing in those periods is selling down your portfolio.
I can’t say there’s a special serum that gets around that, but I would say put some of your portfolio in cash. Have a buffer, and draw down on that for two or three years when the market goes from a peak to a trough. Be grown up about it and maybe cut back on your spending for a year or two.
We try and massage away risk with things like absolute return funds, which I’m sure you’ve spoken about to your listeners. They are the work of the devil in terms of investment! We need to have grown up conversations with grown up people who are retiring about where the real risk is.
If you really cannot stomach a decline in the portfolio and a decline in the value of it at 30% every five or six years, then equities aren’t for you, but appreciate that you probably will run out of money before you run out of life.
PM: What about for those who are what I describe as ‘New Accumulators’ – people who are getting started on wealth-building? Is capacity for loss something they should give even a second’s thought about?
NL: No. Any adviser who talks to accumulators about capacity for loss should be put up against a wall and shot! I say this in my advice letters… No, I don’t, I say it in the back office, where clients won’t see it. The capacity for loss, for the vast majority of people, is an irrelevance, but especially for accumulators.
If you’re a 20, 30 or 40-year-old, you want volatility. You want markets to go up and down like a seesaw, because as you’ve explained in previous episodes, this thing of pound/cost averaging: if you’re dripping money in over a long period of time, you want markets to go down, because you’re buying more of the great companies of the world with each pound every time it does.
Capacity for loss for these people is irrelevant, and I think it’s immoral. I think it’s immoral if you bring it up in front of these accumulating clients. It’s nothing to do with them and you don’t need to complicate their lives with this nonsense.
PM: I agree. I had a client say something to me recently which brought me up short a little bit. I thought, ‘I’m not sure I’ve done a good enough job with this client in reinforcing this message.’ He’s within spitting distance of retirement, and we had an update not too long ago.
I don’t manage any money for him, he’s a planning-only client, which is not the usual. He said that he’d watched the markets declining in quarter four 2018, by about 10 or 12%. He got it all back by quarter one 2019, but he said, ‘If it had been a 30% decline, I think I would have struggled.’
How can we help people with this? Can we? Particularly those who don’t have an adviser – how can they make sure they don’t misbehave their way to poverty in this way and make these mistakes?
NL: That’s a really good question, and this answer’s going to sound a bit self-serving, because I have thought about this. I don’t think the vast majority of people entering retirement with a nest egg that they have sweated decades to build up, that is invested in the capital markets, without an empathetic, caring adviser, will be able to withstand market volatility which we know and expect will occur, which we want it to do.
The DALBAR studies are done by the American company which monitors the US stock market against the returns that investors get in that stock market. It’s not the same as investment fund returns – DALBAR monitor what the investors actually get by looking at when people go in to and out of the market.
DALBAR have been doing this for decades. They show that investors constantly get less than the market would give them if they just stuck their money in the S&P 500 and stared out of the window and did nothing.
This occurs both in rising markets and in falling markets. Last year, the S&P 500, the stock market for the great companies of America, fell by 4.4% over the calendar year. DALBAR’s research showed that the average US mutual fund investor lost over 9% just through poor behaviours.
I imagine a lot of these people went in August or October when the market was doing well, as we’ve had a good 10-year run. The market, as you mentioned earlier, went off a ledge in December, and these people didn’t have an adviser to say, ‘Don’t do that, don’t panic’, so they panicked.
I think our value, and the fees that we charge our clients, is mostly about stopping them making the big mistake. It’s about behavioural management and stopping them. When their mouse is hovering over the ‘sell’ button on their platform of choice, it’s me between them and stupid.
I do think that it’s no good to tell clients, in the middle of a horrendous bear market, ‘Don’t do it.’ You have to inoculate them all the time. Here we are now, a decade on from 2009 where we’re seeing fantastic market returns.
I now, more than ever, say to my clients, ‘We’re going to have another period of volatility and there’s going to be the next crisis.’ Pre-warned is fore-armed. When the boat is sinking, that is not the time to do the lifeboat exercise.
PM: I couldn’t possibly have put it better than that.