In March of 2020, I began to write what I was feeling, and that feeling was a type of worry. I wasn’t worried markets would crash and never recover. Instead, I was worried my clients were concerned about something they couldn’t control or understand. The article I published last year can be found HERE.

As I process last year, I heard from many clients that my blogs, webinars, and meetings truly helped them by simply allowing them to let go of their worry and fear of the markets. By not being concerned about their portfolio, they had the bandwidth to prioritize their job, their health, and the health of those around them.  

So, what now? What does your financial advisor do during a “normal” market? This short piece is meant to be a follow-up to my “Allow Me To Worry For You” article from last year. Titled, “I Am Always Worrying For You,” this isn’t meant to explain how I worry about markets all the time…because I don’t. But it does assume many people worry about their money. And that makes sense to me. You trade your time on the planet for money. For most, money represents their life because it literally is a life exchanged for dollars, and that is probably the biggest realization any financial professional needs to understand. It’s not just private property that is represented by dollars, but minutes and hours and years of a person’s life on this earth.  

However, it doesn’t help anyone to worry about capital markets unless they are trained and watching those capital markets all day. Most people aren’t trained or want to do that therefore you hire someone like me to do it for you. So, what am I doing every day to “worry” for you in this normal market environment?

I will boil it down for you with two main topics. First, every day I am looking at all the markets that make up your portfolio and specifically looking at the movement of the portfolios over different time frames to be sure there isn’t anything outside of normal expectations. Let’s look at those two things in detail:

Define “all markets”

The biggest challenge for most new clients is communicating how following the market through mainstream media isn’t all that helpful in leading them to understand how their portfolio is performing. The media uses the S&P500 or the DOW to quote what the market is doing. It shows up like this, “The market jumped 200 points today…” or “The market hit a new all-time high of 4,500 today…”.  Both of these examples are referring to what is essentially large-company stocks in the U.S.  It is not enough information to give an accurate representation of how your own personal portfolio (that I help manage) is doing. In the domestic portion of my client’s portfolios, we track large, small, large value, small value, and micro stocks. That is five different markets that mostly don’t all move in the same direction on the same day. In fact, we don’t want them to! We want them to have a low correlation to each other, which gives a more smooth ride over long periods of time. The same is true in the international markets. We have all the same categories of domestic equities, but we also have emerging markets. On any given day, I may be looking at somewhere between 10 and 20 different markets around the world to gain an understanding of what “the market” is doing.

Why am I doing this? Is it to predict market movements ahead of time? No. Unfortunately, I can’t predict the future. But I can look at market movements to see how your portfolio responded, then compare it to the math of how we built your portfolio. If it is moving within a normal range of ups and downs, we are ok. If it is outside those norms we need to look a little closer. These “normal ranges” are what we refer to as “standard deviation”.

How Do I Use Standard Deviation?

If an engineer is building a bridge, he or she will use math to build it in a way that allows for the bridge to sway. If the bridge does not sway enough in a windstorm or an earthquake the bridge will collapse.  However, the opposite is also true. If the bridge sways too much, it will collapse. Generally, the type of math an engineer uses to figure out the ranges of success is known as standard deviation. The engineer needs to be able to measure what is a normal (standard) movement (deviation) from the expectation of the structure. If it stays within the standard deviation, the structure is sound and working. Normally, mathematicians will measure out three deviations from an expectation to give them a 99.7% certainty of what to expect.  

Portfolios can be engineered in the same way. If a client has an expectation of a certain rate of return, we use math to build the correct amount and type of equities in the portfolio to help achieve their desired return. But we know we won’t get that exact return every year in a linear fashion. The returns will move or sway or deviate from the expectation every year. It is my job to make sure the movement is within our expectations and ensure the portfolio won’t move too much or not enough.

A great example of this happened in 2020 from January to April, and again in 2021 from January to April. The first time period was the beginning of COVID. An aggressive portfolio was showing a negative return during those months that, had it continued, would have delivered a -80% or so return to the portfolio for the year. That return was way outside the standard deviation of the portfolio. So, while I couldn’t predict how or when, I could tell the investor their portfolio was not in any way likely to be down 80% for the year 2020. Could it have been down 40%? Yes. Could it wind up being positive? Yes. (And it was…who could have predicted THAT?).

Earlier this year, in the first quarter of 2021, the U.S. portion of an aggressive portfolio on its own was on pace to deliver over 100% for the year. This was also outside the standard deviation. The message to my client was simple…at some point along the year in 2021, the portfolio would slow down or have some negative time periods. That was a good thing. It needed to get back to its normal deviation or something would be mathematically broken.

Bottom Line

The bottom line for my clients is this, I am always “worrying” about your money for you. In good and bad markets, I am watching it all every single day. Not because I think I can predict anything, as I know for a fact I cannot. I am watching for patterns that would alert me something might be broken or alarm you beyond any normal fears and worries. If I can see that happening I know it’s time to explain what we are doing and why. From there, we apply the same methodology to the rest of your balance sheet.

Questions or Fears?

If you read this and it still doesn’t help alleviate fears or concerns, no problem! I don’t expect you to understand or retain all of this information. I just want you to know I am following your portfolio and staying on top of it. If you are concerned with any aspect of your financial situation, please email or call me, I am here for you!