The Value Of A Financial Advisor During Market Volatility

Steve Pomeranz: Joe Duran is Chief Executive Officer and founding partner of United Capital. He’s a 3 time author, of which his most recently published third book, The Money Code: Unlocking the Secrets to Great Financial Decisions was a best seller on both the New York Times and the USA Today lists. Joe is going to join me today. We’re going to talk about the markets, and we’re going to talk about what it means to you. In full disclosure, I’m a managing director and partner at United Capital. Hey Joe, welcome back.

Joe Duran: Hi, thank you, Steve. It’s great to be on.

Steve Pomeranz: You know, the indexes themselves don’t signal a bear market, but it sure feels like a bear market. What would you say to that?

Joe Duran: Well, because it is a bear market. What you often see with the indexes, which are all cap weighted, which means the bigger you are the bigger your impact. If big companies are doing a lot better than small companies then it looks like the markets are holding up okay. What you’re seeing now is a reflection of that. The Russell 2000 is in some bear market territory, that’s the index of smaller companies. The smaller companies that you have, the bigger the decline. You’re seeing the average stock down 20% plus so far this year. It’s obviously been a very tough decline. Although, if you’ve been indexing you’ve held up reasonably well. Obviously the international markets have gotten really hurt, as the emerging markets. The only thing that seems to be doing well is gold, which is what you typically see in a bear market. I think the good news is we’re probably past the worst of it, but we’re probably not at the end of it.

Steve Pomeranz: We’ve seen the yield on the 10-year bond go from 2% plus to just over 1 1/2%. That, as a rush to quality, is where a lot of this big money goes because they have no where else to go. Treasuries and gold fly to safety. Does it suggest something a little more sinister than just your standard variety bear market?

Joe Duran: I think that it’s quite possible that we … certainly the odds have gone up that we’re going to have a recession. Again, there are recessions and there are recessions. Some of them are dreadful. I don’t think that’s what we’re in for. If anything, we have very anemic growth, you know, we’re at single digits, 1% type growth. It would be easy to imagine a couple of consecutive quarters of -1/2%. I don’t think, again, you don’t have any of the earmarks you had in 2008. Individual households have less borrowing today than they’ve ever had in the last 30 years. Individuals have very healthy balance sheets. Corporate America has really healthy balance sheets. Most importantly, the US banks look fantastic on a cap risk level. The European banks another story. They are really the canary in the coal mine. They are where the risk lies.

If you’re in the US, candidly expect—we’ve been 7 or 8 years in this recovery—that there’ll be some turbulence. With the Fed stepping back just expect normal volatility. We’ve been really spoiled for the last 3 years with unusually low levels of volatility. Now, when the Fed typically tapers back, you’ll see increased levels of standard deviation, of movements in the market. I think we’ve only had 4 days this year that we’ve swung less than triple digits on the Dow, which is amazing.

Steve Pomeranz: Someone said to me the other day, “You know, if we’re down 10% or whatever the market is down, how long is it going to take to dig out of the hole?” I said, “Well the market’s moving at 2-3% a day. It’s not going to take that long when it starts to come back.” You know, we’ve gotten used …

Joe Duran: The thing to remember, Steve, if you go to cash, you’re guaranteed you’ll never make it back. The thing to remember always is, where are you going once you protect yourself? You’re only going to want to go back in once the market has actually recovered all the losses. I always tell people, “Getting out of the market requires 2 right decisions: when to get out and when to get back in.”

Steve Pomeranz: Right. Many people will get the first correct because their gut tells them, but they almost always get the second wrong.

Joe Duran: Absolutely, absolutely.

Steve Pomeranz: The big question really is, why do I care? I have a percentage of my money in stocks. Let’s say they’re very well diversified. We’ve got index funds or mutual funds or money managers. I feel my wealth, my resources declining, and yet I know that I’m going to have future needs for income. The 2 juxtaposed together cause tension. Declining resources and knowing that you’re going to need more money if you may live longer. How should the average person be thinking about this market in context of their own life?

Joe Duran: The first thing that they need to do is think about how their decisions and their emotions might cloud their decision making. It is a normal condition for humans to feel stress when they have a big decision to make and an uncertain outcome. Certainly, while we might have opinions about where the market is going, we don’t know with certainty. What you’re describing is a condition all humans feel whenever they have a big choice and no certainty in outcome. This is where, again, having no clarity about specifics, about what you need your money to do for you, can create a lot of chaos. One of the main reasons people should work with an advisor who understands what they want to accomplish in their life and what they can and cannot do, is understanding where that balance is. Let me just use an example, Steve. If the markets go down, you have a choice of protecting what’s left and going to cash or keeping it where it is and changing the choices you make in the future. To give you an example. If I’m 3 years from retirement, and I know that my retirement savings are going down, I have the choice of protecting or going to cash and locking in whatever losses I have and keeping my plan of retiring when I was with less money than I expected. Or, I have a choice of working an extra year or 2. Or I have a choice of saving more money for the next couple of years, keeping my money invested so I can make back what I had lost. Those delicate trade-offs require a professional, because candidly, it’s very hard to be objective when it’s your life.

There are 2 very explicit steps that you want to follow. First, what are the things that really matter to me that I really cannot negotiate? I definitely want to retire in 3 years, or I definitely want to visit with my grandkids once a year. There are things that we as humans are non-negotiables. Then there are some things that we’d like to do, but we’re okay if we have to defer them for a while. We might want to retire, but we’re okay if we have to wait an extra year or 2. Those choices and understanding how to do them, not just by yourself, but if you’re married, with your significant other as well, really helps to have an impartial person who can help you prioritize and let you make those choices when you’re faced with those tough consequences.

By the way, your financial ad with be filled with them. Having a lens with which objectively to stare at them and say, “Okay, here are the things we can control and this is how we should trade them off until things fix.” Again, the good news about the market is, as long as you do nothing rash, it almost always comes back. Even after huge bear markets, like 2000 and 2008, we continue to go to new highs.

Steve Pomeranz: How do you know if you’re going to need to delay a year’s work? Are you just saying, “Hey, we’re in a bear market. Maybe that’s a good idea?” How do you actually quantify something like that?

Joe Duran: This is, I think, one of the most exciting things that’s happened in financial life management that has happened in the last few years. It’s the ability to map out your entire life and actually run scenarios where you stress test what happens if the market falls 10%? What happens if I retire a year earlier? Actually show you the percentages and show you when you’re in a safe zone or an unpredictable zone. Actually make the trade-offs right there live in a dynamic way using technology to actually show you, “Here’s your life if you work an extra year. Here’s your life if the market falls another 10%.”

I’ll give you a really good example. In 2008 right at the peak of the bear market one of our very important clients retired in the Midwest in Michigan. As luck would have it, he gets a beautiful rollover, he’d saved his whole life. As he retires the market collapses and he loses on his entire net worth about 25%. He was invested in stocks and bonds, as you know the market fell 50%. He went into a panic and said, “I need to go back to work. I need to move all my money to cash.” By using modern technology to show how his life was unfolding, he found out that by simply cutting back his spending from $76,000 a year down to $72,000 a year, just saving $4,000 a year, which is a few meals out, maybe a bit less Starbucks, maybe 1 less vacation, that he needed to change nothing at all. He did nothing at all, and within 18 months he was able to re-increase back his spending to $76,000.

As humans, we naturally always think our only choice is to move the money in and out of the market. In fact, in this case because we were able to show him that by adjusting his spending he needed to change nothing. He was able to ride out the decline, and in fact recovered in new highs within 18 months, take his life back to where it was. Had he gone to cash he absolutely would have been forced to completely change his entire life forever. That is where having a professional helps you understand those choices is very very important.

Steve Pomeranz: My guest is Joe Duran, Chief Executive Officer United Capital and the author of The Money Code: Unlocking the Secrets to Great Financial Decisions. It sounds to me like you’re talking about the difference between the things that we can control and that we can’t control. Almost like the old alcoholics anonymous saying, right? It applies here.

Joe Duran: Yes, it absolutely, it does. We all spend a lot of time watching CNBC and reading the papers about the markets and interest rates on the dollar or inflation, things which we have absolutely no real control over. Yet, while it’s all kind of interesting, and it all definitely impacts our lives, the things we can control are very finite. You can control how much you spend. You can control how much you save. You can control the amount of risk you’re willing to take. You can control the timing of major decisions, defer spending and saving to different time periods.

If you control those things, it’s not just the risk lever. Most humans really limit themselves to that and spend so much time concerned about things they have absolutely no control over. The markets are going to fall. They’re going to go up, or anything else. You need to say, “Look, since I can’t control it it’s kind of like weather.” I always tell people, “Being concerned about the markets like being concerned about the weather.” What do you do when you have bad weather? You get indoors and you either decide, “I’m going to walk out with an umbrella or not. I’m going to stay in my house or not.” You concentrate on what you can control, because complaining about the weather gets you nothing. The markets are the same way. They’re going to do what they’re going to do, and you need to decide, “Should I wear an umbrella today or not?” Bring an umbrella.

Steve Pomeranz: The difference is that when you walk outside and it’s raining it doesn’t feel as bad as when you see the market go down because of the stress of even a paper loss means to you. My guest is Joe Duran. To find out more about Joe and to hear this interview again don’t forget to join the conversation at onthemoneyradio.org. My guest is Joe Duran. Thank you so much for joining us.

Joe Duran: Thank you, and thanks for this fantastic show. I just love it.

Steve Pomeranz: Thanks Joe. All right, we’re out.