Because You Asked: How Optimistic Should We Be?

April 23, 2020

In our practice, one of our key values can be described as ABL- Always Be Learning.  To that end, we read voraciously, participate in webinars and web-based learning opportunities frequently, and attend conferences regularly.  We are certainly not attending any conferences right now, but there has been a LOT of information to read and listen to, and grapple with for our own understanding and how to best help our clients and friends.

 Realistic Optimism:

The inspiration from this blog post came from an article I read this week from Steven Wershing on The Client Driven Practice.  The article referenced a story about Admiral Jim Stockdale in the book Good to Great by Jim Collins.  Admiral Stockdale was the highest-ranking POW in Hanoi during the Vietnam war, and Jim Collins was talking to him about state of mind.  Here is the content of that discussion:

Q: Who didn’t make it out?

Stockdale: Oh, that’s easy, he said. “The optimists.”

Q: “The optimists? I don’t understand,” I said, now completely confused…

Stockdale: “The optimists. Oh, they were the ones who said, ‘We’re going to be out by Christmas.’ And Christmas would come, and Christmas would go. Then they’d say, ‘We’re going to be out by Easter.’ And Easter would come, and Easter would go. And then Thanksgiving, and then it would be Christmas again. And they died of a broken heart.”

Another long pause, … Then he turned to me and said, “This is a very important lesson. You must never confuse faith that you will prevail in the endwhich you can never afford to lose—with the discipline to confront the most brutal facts of your current reality, whatever they might be.”

Jim Collins called it the Stockdale paradox: It blends the importance of maintaining a positive attitude with the recognition that setting specific expectations can backfire.

Some of the questions that have come to us recently are variations of “When will this be over?”, and of course we do not, indeed cannot give a firm answer to that.  There isn’t one, and no one truly knows.  Will we get through it?  We will pretty emphatically tell you that we Will; we just don’t know When, so in reference to setting expectations, we strive to be as realistic as possible.

In times of market volatility, our advice to clients is often along the lines of “stay the course”; “don’t quit in the middle”; or “the ship will right itself and resume course”.  While this may be reassuring for some, it can also leave one with the feeling that we are not doing anything, and that we need to do somethingSo, what is there to be done? How can we confront the “brutal facts of our current reality”?

 Doing Something:

As discretionary investment advisors, it is our job to constantly assess client portfolios and re-allocate or re-position them to take advantage of market conditions, whether for the present or projected future growth.  Our responsibility is to help manage investments so that our clients will be able to fulfill their plans.  That is what we can and will do, in the crazy times as well as the good times.  It is what our clients hire us to do: to oversee, to manage, to facilitate the plans that we have developed with them, and to provide perspective in all of these circumstances.

But what can individuals do?  As individuals, we get to make more immediate, day-to-day decisions.  Is it an option to reduce spending temporarily?  Possibly.  We are certainly not going and doing much these days, so the need for cash may be lower than normal.  Planned trips and vacations have been cancelled, so that is another chance to conserve a bit of cash that we anticipated spending.  I’ve even known of several weddings that were downsized to simple ceremonies with immediate family only- talk about savings!

Another opportunity for saving/spending less came in the form of one of the CARES Act provisions: you are not required to take your normal RMD (Required Minimum Distributions) from your IRA’s in 2020.  That lends itself to more saving and also lower taxes that will be due next year.

Granted, these are relatively small changes, in the framework of the much larger changes we have already experienced from shrinking our interactions with the world.  But they are small changes that can still have a large impact.  Having the flexibility to reduce distributions from investment portfolios while they are in a down trend, leads to the opportunity to experience a better recovery on the other end.

 We Will Survive

It has been mystifying at times to try to ferret out the truths and facts around the Coronavirus and the subsequent actions taken to address it, as well as trying to follow the ever-changing guidelines and orders from our leaders.  During this process of trying to navigate all of these unknowns, we also have to acknowledge the stress resulting from watching precipitous drops in the value of our investment portfolios, while trying to exercise good judgment and keep ourselves and our families as safe as possible.  So, stressful? Definitely. Calamitous in the long run? Possibly, but for most, probably not.

When we examine our current condition in the context of those who suffered as POW’s or even compared to our front-line health care providers, it comes nowhere near the same level of challenge, but still feels “brutal” to us all the same.  So, referring again to Admiral Stockdale, we ought to all strive to realistically confront our own circumstances, and yet hold fast to the belief that we will still prevail in the end.

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