Written by J. Womack
“Everyone has a plan until they get punched in the mouth.” – Mike Tyson
Growing up, I recall my family gathering with friends to watch Mike Tyson fights. If you ever had the opportunity to watch Mike Tyson in his prime, you can understand why our anticipation was electric. If we could have fast-forwarded through the undercard to the main event, we all would have, because, without question, we knew Mike Tyson was going to destroy his opponent — it wasn’t a matter of if, but when and how badly.
I have to imagine that all the heavyweights he fought studied tapes of Tyson and put together sound plans for their fights with him. Tony Tucker, Michael Spinks, Frank Bruno — each championship caliber in their own right — all had well-thought-out plans.
At least they did until the bell sounded. “Ding, ding, ding.” That sound changed everything. No longer were these fighters sparring against a punching bag (actual or metaphorical). They were face-to-face with Tyson, the destroyer himself. If Tyson’s record through the 1980s was indicative of the effectiveness of planning by his opponents, we can see why he confidently made the now infamous statement.
On February 11, 1990, something unexpected happened. James “Buster” Douglas slayed the giant. Douglas’ plan, combined with ongoing support and coaching from his corner, let him knock out Mike Tyson out in Round 10 of the fight. Even though he got knocked down in Round 8, he recovered for the win.
Financial advisors, are your clients like Michael Spinks or Buster Douglas?
What Do Mike Tyson and the S&P 500 Have In Common?
They have both knocked many people off their plan. In 2018, the last calendar year since 2008, when the S&P 500 return was negative, the benchmark index declined by 4.38%. According to the Dalbar’s 2019 Quantitative Analysis of Investor Behavior Report (QAIB), the average equity investor realized a loss of -9.42% over the same period1.
That means that for every $10,000 the average equity investor had in their portfolio, they were $500 worse off than they would have been had they remained invested.
That short-term behavior leads to similar outcomes over longer time periods. Based on Dalbar’s 2020 QAIB, on a trailing 10-year basis, the average equity investor realized gains of 9.43%, while the S&P 500 returned 13.56%, which represents a 4.13% difference in annualized returns2. That translates to about $4,989 in lost earnings3.
The first quarter of 2020, the impact of COVID-19 and the impact on returns for 2020 remain to be seen. However, there is one thing that we can say with some certainty. Market volatility, like Mike Tyson’s right hand, comes out of nowhere and even the best, most comprehensive financial plans can be thrown off when the market gives a punch in the mouth.
You Have to Be Active in Your Client’s Corner
Michael Spinks fought Mike Tyson in 1988. At the time Spinks was undefeated and a fan favorite. But, 91 seconds after the bell rang and the volatility of right hooks and uppercuts ensued, he was on the canvas.
Buster Douglas was different. By the third round of the fight, anyone who had become accustomed to Mike Tyson’s devastation of other opponents knew his approach was different. With each successive round, Douglas returned to his corner, where he was reminded of the game plan and coached on what he needed to do in the ring at that particular moment. Despite finding himself on the canvas in the eighth round, Douglas ultimately weathered the storm and came away victorious.
What was different? From planning through execution during the barrage of punches, the ongoing coaching from his corner contributed to his victory. That invaluable coaching is what your clients so desperately need, in particular during periods of volatility and uncertainty like the one we find ourselves in today. While clients may know what the right thing to do is, when faced with volatility, any coaching and planning you have done may go out of window. This is clearly seen in the data from the Dalbar studies.
As your clients’ financial trainer, it is important that you actively engage with clients in an ongoing process of coaching, in particular during times like these. It is during these times, when market volatility is delivering a barrage of right hooks and uppercuts, that clients can realize the full potential of the value of having you in their corner. Your clients can either end up knocked out, with their long-term financial goals at risk or worse, unattainable, or they can emerge from the onslaught of volatility plan intact, and continue on to victory.
The Key Is Consistency and Focusing on the Goal
For Michael Spinks, it was a risky proposition to get into the ring with Mike Tyson. If an opponent could not manage Mike Tyson’s aggression and leverage it for his benefit, he would get knocked out. Buster Douglas had a 12-inch reach advantage over Mike Tyson. A key part of his game plan was to use his jab and reach to his advantage against Mike Tyson’s aggression. Mike would keep coming after him because that was his style. If Douglas could just stay the course after the initial onslaught, over time, Tyson’s aggression could play to his advantage. On the other side of the final bell, that was the case.
Douglas remained consistent in his approach, held fast to the game plan that he and his team came into the fight with, and he emerged victorious. While your clients may never enter the boxing ring, investing in equity is risky and, at its worst, the S&P 500 may knock some investors “out.” As we saw from the QAIB data, a knockout can have a significant, adverse impact on their ability to fully realize their financial goals. Ensuring that your clients’ plans are aligned with their objectives, and that they don’t deviate from those plans, can be the difference between emerging victorious having achieved their goals, and getting knocked out. In the end, the key is consistency, sharp focus on the end goal, and continuous reinforcement through coaching.
1 Dalbar 2019 QAIB Report
2 Dalbar 2020 QAIB)
3 Past performance is not an indication of future expected results. Does not include the effects of fees, taxes, or other costs usually associated with investments)
DALBAR Methodology: Average stock investor performance results are based on a DALBAR study, “Quantitative Analysis of Investor Behavior (QAIB), 2019” DALBAR is an independent, Boston-based financial research firm. Using monthly fund data supplied by the Investment Company Institute, QAIB calculates investor returns as the change in assets after excluding sales, redemptions and exchanges. This method of calculation captures realized and unrealized capital gains, dividends, interest, trading costs, sales charges, fees, expenses and any other costs. After calculating investor returns in dollar terms, two percentages are calculated for the period examined: Total investor return rate and annualized investor return rate. Total return rate is determined by calculating the investor return dollars as a percentage of the net of the sales, redemptions, and exchanges for the period. Systematic investing examples are hypothetical and for illustrative purposes only. Systematic investing involves continuous investments regardless of security price levels. It cannot assure a profit or protect against loss in declining markets. The Average Equity Fund Investor is comprised of a universe of both domestic and world equity mutual funds. It includes growth, sector, alternative strategy, value, blend, emerging markets, global equity, international equity, and regional equity funds.
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