Securities Fraud Lawyer Blog
As I sit here on a Sunday afternoon, listening to some tunes and wondering what will be the ripple effect of these strange times, particularly for the retail investor who has enjoyed an 11 year run of a bull market, I for some reason thought of The Clash’s “Should I Stay, Or Should I Go Now?”. It’s worth a listen…
Who would’a thought that the title and lyrics from the English punk rock band “The Clash” from 1981 might aptly describe the retail investor’s conundrum given the Coronavirus meltdown in the equity markets? As a retail investor with a sizeable amount of your life’s savings in the market, “should you stay or should you go…?”
While The Clash’s song romanticized the ebbs and flows of a relationship, I can’t help but find so many things about this song that are ripe for the times…
Darling, you got to let me know
Should I stay or should I go?
If you say that you are mine
I’ll be here till the end of time
So you got to let me know
Should I stay or should I go?
There is little doubt that thousands of retail investors are asking their brokers what they should do. So what should a retail investor do? The markets have been down ~28 % from record highs. For the past decade or more, overall equity markets made brokers and advisers look genius; heck, even the chimp and the darts looked like clairvoyants. But as Warren Buffet is known for saying “Only when the tide goes out do you discover who’s been swimming naked.” The tide has gone out….
So what exactly does “swimming naked” look like (in relation to investing, of course)? Buffet was referring to the institutional investor that ignored inherent risk, such as the large institutional investors that got caught asleep at the switch during the financial crisis of 2008—certainly they knew the tide would go out someday, and yet…
Every financial adviser or stockbroker knows that the answer is “when” the tide will go out, not “if” it will, so it is imperative for the financial professional to make their recommendations accordingly. But despite the certainty of a market correction, there are many retail investors that were advised to swim naked with their life savings at risk. What might the retail investor skinny-dip have looked like in this market cycle?
- Lack of diversification between asset classes
- Concentration in one or a few asset classes (i.e., equities)
- Improper asset allocation given risk tolerance and time horizon
- Investing using margin
- Relying on income as “fixed” that is not really fixed or sustainable (or dependent on equity portfolio values)
- Leveraged investing using margin
- Leveraged ETFs
- Iron Condors
- Credit spreads
- Short puts
- Structured products
- Other complex option strategies
As The Clash intoned…
It’s always tease, tease, tease
You’re happy when I’m on my knees
One day it’s fine and next it’s black
So if you want me off your back
Well, come on and let me know
Should I stay or should I go?
I can’t help it, the lyrics are just too good…
If I go there will be trouble
And if I stay it will be double
So, do the lyrics foreshadow what’s to come? For the client that sells after the correction, “there will be trouble”. Hmmmmm, what type of trouble? Realized losses? Changed lifestyles? Back to work? Complaints? Arbitrations? We don’t know each client’s form of trouble, but when an unsuitably allocated portfolio meets with a significant market correction, trouble is a certainty.
For the client that stays the course and holds steady as so many brokers now advise, the lyrics tell us the trouble will be “double”…maybe because the client can’t re-earn the life savings lost and these losses will have permanently changed their financial future? Or does it foretell of the doubling of the account if they have the ability to stay in the market? Hmmmm…it’s always tease, tease, tease…should I stay or should I go?
Heck, even the name of the band symbolizes the conflict in retail clients’ accounts and minds—The Clash!
Enough with the spin on words. The losses resulting from market corrections can change lives, but the risk and the possible consequence when the risk is realized should never be a surprise IF the financial professional did their job. That is why folks give their money to the professionals…so the risk can be disclosed, described, and managed.
Maybe the answer for both the client and the broker lies in the fundamentals of risk tolerance and how the account was opened and maintained by the broker. Risk tolerance necessarily requires consideration of an investor’s time horizon. The shorter the time until the time when the money may be needed, the lower the risk tolerance. Market cycles last for years, normally, not weeks, and any investor that can withstand the few years that a recovery normally takes, should not be too concerned about an equity portfolio, provided equities were appropriate in the first place. On the other hand, for those investors that may need their funds now, or in the next year or so, significant exposure to equities may not have been suitable, and such exposure should never have been recommended. If the broker failed to properly identify the risk tolerance of the account, which by necessity must have included a discussion of how a client would tolerate risk when it is actually realized and losses occur, then perhaps there will be trouble, even double trouble, and the investor with a portfolio built on unsuitable recommendations without a proper determination of risk tolerance should bring an arbitration and recover their losses and damages.
If, on the other hand, the risk tolerance of the account was properly determined and updated, with the client understanding exactly what were the risks and the possible consequences if/when realized, there should be no trouble whether the client stays or goes…just losses. In suchinstance, the financial professional discharged his/her duties and the investor should consider himself/herself fortunate to have worked with such a good adviser or broker.
The lesson is that brokers are not guarantors of profits, or indemnitors of losses, but they are purveyors of advice and recommendations that can only be the product of a proper and continual determination of suitability and risk tolerance, and they should have the client’s best interest always in mind. Stockbrokers and advisers have duties, including the duty to keep a client’s best interest at the forefront of every recommendation, and these duties exist for a reason…to protect the professional and the public investor.
Darling, you got to let me know
Should I stay or should I go?
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