Friday, October 10, was one of the darkest days of my professional career. Indeed, that whole week was one of the most emotionally exhausting times I’ve ever had in my work. It was a helpless feeling watching the portfolios of my clients in a free fall, melting away like ice cream on a hot summer day, for seven straight trading days. Then on that Friday, to watch the Dow hit 7,777 intraday was overwhelming.
Jim Cramer of CNBC’s Mad Money show was telling people to sell, small investors were cashing in their stocks and took $50 billion out of mutual funds in one week, and investors calling Fidelity were on hold for 20 minutes before reaching a broker. As I watched the panicked herd rush to dump stocks, I had a brief moment of wondering if the free fall would ever stop and if I was the crazy one not to be panicking with them. Of course, that day had all the trappings of a market bottom. Whether it was remains to be seen.
In that moment, I found myself wondering if everything I had learned and believed about asset allocation and buy-and-hold investing was defective. I wondered if everything I knew and understood about investments was wrong or had changed. I wondered if I had in some way failed my responsibility to my clients. Shouldn’t I have seen this coming?
Certainly, most of us knew the real estate party would come to an end. We knew that requiring nothing down and lowering borrowing standards would eventually result in losses to the lenders and foreclosures to some borrowers. What most of us didn’t know was the manner in which Fannie Mae, Freddie Mac, and investment brokers pooled and partitioned these sub-prime loans in a way to get AAA ratings for them, and sold them to investors. Those investors then used the questionable AAA ratings to secure short-term bank loans which allowed them to highly leverage their positions.
There were a great many sophisticated players close to the inner workings of this situation: the mortgage lenders, investment bankers, regulators and members of Congress. They all missed the warning signs which, in hindsight, now appear so obvious. Even they didn’t see this coming.
Still, how we got here is little consolation to those of us that have lost so much. The portfolios I manage are far more than numbers. Behind those numbers are the lives, businesses, and faces of real people. To watch my clients’ holdings be down 25% at the bottom of the fall was as painful for me as it must have been for them. In fact, I began to wonder whether it may have been more painful for me. I made that assumption based on the fact that I had only heard from ten percent of my clients in the preceding two weeks.
On that dark Friday, I decided to take the initiative and call my clients. To many financial advisors, this may have seemed like a really dumb idea. A few told me that, rather than initiating calls to clients, they were wishing their phones wouldn’t ring. Of the clients I talked with, not one was panicked. They were concerned, but they all were taking the drama of the markets in stride. Some of them were maintaining that perspective by deciding not to pay attention, which in the short term is a good thing. After reaching out to my clients, I actually ended the day in a much better mood. Maybe they didn’t need to talk about the economy, but apparently I did.