The Value of a Fiduciary in Volatile Markets

by | Nov 6, 2020 | Podcasts

When you work with a fee-only fiduciary investment advisor, you know that any recommendation or investment decision is 100% in YOUR best interest.  In Ep. 330, Tom and Tim discuss the value of a fiduciary during volatile markets like what we’ve experienced in 2020.

Show Notes

‘The Stock Market Doesn’t Care Who Wins’ – Josh Brown – The Reformed Broker

‘What Does the Stock Market Do Around Election Day?’ – Nick Maggiulli – Of Dollars and Data

‘Portfolio Tweaks Before the Election’ – Michael Batnick – The Irrelevant Investor

‘The Stock Market & Presidential Elections’ – Mullooly Asset Blog

The Value of a Fiduciary in Volatile Markets – Transcript

DISCLAIMER: Tom Mullooly is an investment advisor representative with Mullooly Asset Management. All opinions expressed by Tom and his podcast guests are solely their own opinions and do not necessarily reflect the opinions of Mullooly Asset Management. This podcast is for informational purposes only, and should not be relied upon as a basis for investment decisions. Clients of Mullooly Asset Management may maintain positions in securities discussed in this podcast.

Tom Mullooly: Welcome back to the podcast. This is episode number 330. Thank you for tuning in. I am Tom Mullooly and joining me today is Tim Mullooly for election day special.

Tim Mullooly: Yes, we are recording this on Tuesday, November 3rd, 2020. The presidential election ends today. It started a while ago.

Tom Mullooly: Well, I hope it ends today.

Tim Mullooly: Well, the casting of votes will end today.

Tom Mullooly: So we’re recording this on Tuesday. It has to go through the editing process. So folks may not be listening to this until…

Tim Mullooly: Probably the end of the week, I think, at the earliest, Thursday. Usually, we put these up on Friday. So if you’re listening to this on Friday, hopefully we have some sort of results or indication of how things are going to shake out.

Tom Mullooly: But we may not know by the time you’re listening to this who has definitively won.

Tim Mullooly: There was a message that we had for people in the video this week and our message this whole time about the markets and the election and what to do in terms of changes to make in your portfolio and things to do, our message has been consistent this whole time. So we’re able to record these podcasts and videos before we know what happens because our message isn’t going to change regardless of the results. So the video we recorded on Monday, the podcast we’re recording today on Tuesday, the message is the same on these days as it’s going to be on Wednesday or Friday, or whenever we get the results.

Tom Mullooly: The message basically is, “Hey, if you have a cash need, if you’ve got money in an investment account that we’re managing and you need that money in the next three months, six months, nine months, it should be nowhere near stocks.” It just shouldn’t be. Even longer periods than that, we’re very confident, unless something’s happening that we don’t know about, we feel totally secure in our recommendations to our clients on the allocation.

Tim Mullooly: We’ve made the point that a lot of the money that we manage for people is long-term in nature. So the results of one presidential election or one headline or one story, because there’s always going to be stories that are moving the market… Earlier this year, we had the pandemic came and rocked everyone’s world. For the long-term, that wasn’t a reason to rip up the script either. Now, the same thing’s happening here in November. In 2021, I’m sure there’s going to be something else that comes along that gets everyone’s attention. These short-term events are not a reason to rip up a long-term game plan, especially when that money needs to get you to and through a retirement.

Tom Mullooly: It’s very true. When we talk about returns and expectations for clients, if we’re talking about long-term returns of 6% or long-term returns of 5%, 7%, whatever the number is, understand that we bake in to those projections numbers that include bad years, that include rocky periods, bumpy periods during the market. We’re very confident in how we’re positioned no matter what the result is going to be this week or for any other event in the future.

Tim Mullooly: There’s going to be up years and down years. That average that you’re talking about, it’s not a straight line, smooth every year, crisp 6% on the button. There’s going to be higher than that, lower than that. There was an article that Josh Brown wrote from Ritholtz that kind of echoes some sentiment that we have been conveying in blog posts and videos and podcasts that the stock market doesn’t care who wins. We talked about it last week, how if a Republican wins or a Democrat wins, companies are going to find ways to continue to make money and continue to grow. So the market doesn’t really care who wins. The market wants to know.

Tom Mullooly: Yeah, and it wants to move past-

Tim Mullooly: Exactly.

Tom Mullooly: … this event and on to the next thing.

Tim Mullooly: Right.

Tom Mullooly: So that’s why we saw last week, this was the last week of October, we saw markets selling off pretty hard. I think the averages were off about 6% in about a week and a half. It turns out that most of the selling was done in some of the real large cap technology names. Maybe that’s people just taking money off the table because they’ve had a good run. We didn’t see too much selling across the board, across the entire sector or the entire averages. We just saw the selling really confined to the large cap tech names.

Now, we’re seeing just the opposite. We had a big up day Monday. We’re having another big update today. As Josh pointed out, this appears to be a reflex rally or the market just exhaling, that we’re finally at the finish line for this event, hopefully, and it doesn’t drag on right past the election day.

Tim Mullooly: Yeah, and there was a post from Nick Maggiulli, also at Ritholtz, talking about what the stock market does around election day. Like we’ve been telling clients, we expect and it’s happened this week, and the last handful of trading days, last week too. You expect markets to be volatile leading up to the election. Nick actually pointed out in his post, you usually see more volatility leading up to the election and it tends to not really continue on after the election. It’s for that reason that you just said, and like what Josh pointed out too. The market just wants to know and exhale afterwards and move on.

Tom Mullooly: The corollary to that is what happened 20 years ago, 2000 when we had Bush and Gore, essentially in a flat-footed tie? This went on for another 33 days after the election. I know I mentioned this in a video a couple of weeks ago, but it was 33 days, but it felt like 33 years because every day you came to the office with this black cloud hanging over, you did not know who the president was and what the game plan, what the agenda was going to be for a new administration and things got held up until the Supreme Court basically told the counters in Florida to stop doing the recount. That ended it. Then we were able to move forward.

But interesting to note that the market hardly moved during that period. In that 33 days, the market was down three and a half percent. Now, the day of the election, the market was down about 3%. So if you were to say, “Okay. From election day until the day that the Supreme stepped in, the market was down six and a half, 7%, something like that,” but just the period of not knowing, the market was down three and a half percent.

Tim Mullooly: On top of that, it might’ve seemed like 33 years, but in the larger picture, it’s just 33 days there. Even if it takes 33 days to find out this time who has won over the span of your investing career, 33 days is nothing. It’s a blip on the radar there.

Tom Mullooly: You’re right. The other point that I’ll add on top of that is nobody, nobody wanted to do anything during those 33 days because they didn’t know who was going to emerge victorious.

Tim Mullooly: Everything is in limbo at that point. Everyone’s kind of collectively holding their breath, waiting to see what happens.

Tom Mullooly: I wouldn’t be surprised if we see a contested election and then we see several days or even several weeks where we don’t know the outcome. No one’s going to want to do anything in either direction, buying or selling, because they don’t want to be on the wrong side of the trade.

Tim Mullooly: Right.

Tom Mullooly: I think what we’re seeing most of the time now in these weeks leading up to the election and people trading immediately after the election, are trades. They’re trading and this is not stuff that our clients normally get mixed up in.

Tim Mullooly: Right. Yeah. I think for anyone listening who might’ve wanted to make preemptive changes or wholesale changes leading up to the election and didn’t and stuck with their plan, I applaud you for doing that because leading up to this whole year in general, every day there are new headlines and new, crazy stories coming out and things trying to wear you down and get you to make these moves that will, in the long-term, end up hurting you. So if you were able to stick to your guns, hats off to you and also use this as something to learn from moving forward when tough obstacles pop up and make you want to make emotional decisions.

Tom Mullooly: I know that Mike Batnick wrote an article talking about portfolio tweaks around election time. He had basically, a survey that showed the percentage of people who increased cash or added protection by buying puts or selling calls against positions, or they made adjustments to their sector allocations.

Tim Mullooly: Yeah. It was a UBS survey and sets of 63% of the people that were surveyed for this said that they made some kind of change to their portfolio ahead of the election. I think 35% increased cash, and I think like 26% or 27%, like you said, added protection.

Tom Mullooly: In just my opinion, that’s way too high, these numbers.

Tim Mullooly: Yeah. I wasn’t surprised by them. We haven’t been recommending people make changes in anticipation of the election. I think Michael had a pretty good point. If making small tweaks or adding a little bit of cash was a way to stop you from making an all in or all out decision, he said, “Do what you got to do.” On the degree of bad decisions, that’s a little bit better than taking all of your money out of your investment.

Tom Mullooly: That is almost always a bad idea. You’ve heard me say this to clients. In 35 years, there’s been exactly one time where that made sense, and that was 2008, to go all in or all out.

Tim Mullooly: Yeah. You could even make a case that even 2008, you didn’t have to do that.

Tom Mullooly: Right. Right.

Tim Mullooly: Yeah. There’s hardly ever a time where that makes sense or where that will be a good idea and it’ll work out for you in the long run.

Tom Mullooly: I wonder sometimes if I were back in production as a broker and working on commission, if clients called up and said, “Hey, I want to make adjustments in my portfolio ahead of the election, and then we can go back in after the election,” I just wonder how tempting it is. I’m sure the answer probably would have been, “Great.”

Tim Mullooly: Yeah, let’s go it. Yeah, because they’re getting paid/ Brokers, you would be getting paid on the way out and then getting paid on the way back in. I think that that for us here, as fiduciaries and fee only, we don’t have that decision to make. There is no commission coming in for us on the way out or the way back in. So any decisions that we make for our client’s money, you know that it’s in your best interest because we’re not gaining anything financially from that.

Tom Mullooly: I just have to share this. The very first presidential election that I was involved in when I was in the business, I remember the elections before getting into the business when I was going through school, but the first election where I worked on Wall Street was the reelection of Ronald Reagan. He was running against Walter Mondale. I’m not a historian, but Walter Mondale in September two months before the election said, “I’m going to raise your taxes if I’m elected.”

To my knowledge, that was the first time a candidate ever said those words out loud. That was pretty much the end of his campaign. In that election, Reagan wound up winning 49 states. So Mondale took Minnesota, his home state, and the District of Columbia. You think about some of these deep, blue states, these Democrat states like California, New York, some of these states have always been Democrat, even those flipped Republican at that point. So I think saying raising taxes can sometimes be a third rail. It’s part of the reason why nothing ever gets solved when it comes to social security problems too. People don’t want to deal with this stuff because it’s political suicide.

Tim Mullooly: Whether the policies that the people enact will or won’t raise taxes, the candidate is always going to say, except for, I guess, in this one situation, the candidate’s always going to say, “I’m not going to raise your taxes,” and the person, their opponent is always going to say, “That person’s going to raise your taxes.”

Tom Mullooly: Right. Also, we’re recording this on election day, and so by the time you hear this, it’s going to be over, but I know that on Tuesday afternoon, people are going to start talking about exit polls, people coming out of the polling centers and saying, “I voted for this guy. I voted for that guy.” Interesting story, when W. Bush ran for reelection, he ran against John Kerry, according to the exit polls, everybody came out of their polling centers saying that they voted for John Kerry and John Kerry was going to be the next president. The market started selling off that afternoon. The market continued to sell off when rumors began in the afternoon, that W. was writing his concession speech. It turned out to be totally wrong. So you can’t go on what the media has been telling. We just have to wait for the dust to settle on this. Now, in this case, we may not know on Wednesday morning. We may not know for the next couple of days.

Tim Mullooly: Yeah, and I think in terms of your portfolio, it doesn’t necessarily matter what the results are anyway because our message to people that wanted to make tweaks ahead of the election was that we think it’s a bad idea and that the stock market doesn’t care who’s in the White House. That’s going to be the message after the fact too. So regardless of who wins, if you thought about making changes ahead of time or are thinking about making changes based on the results, just know that there’s a lot of evidence to support the fact that it’s not going to matter for your investments over the long-term.

Tom Mullooly: So I’ve seen several headlines in just the last few days saying the very same thing that you just echoed and people point out that markets tend to go up over time. I began writing a new blog post this morning, and then I just scrapped it because I could basically sum it up with that line I just said: the markets go up over time. What I wanted to do was show when Mondale was running against Reagan in ’84 where the Dow was, and then where it was in ’88, ’92, ’96, 2000 and go straight through to today. We know the answer. I think in 2008, that was maybe the only time where the market might have been lower than it was in 2004.

Tim Mullooly: Yeah. We put up a blog post on the Mullooly Asset Management website, I think it was last week or the week before, and it outlined, I think, going back to the eighties, the performance of the stock market under whoever was president. I think you’re right, George W. Bush was the only one that it was negative.

Tom Mullooly: I’m not trying to defend him, but I think his number would have been close to flat if we didn’t have this collapse in 2008.

Tim Mullooly: Right. Yeah, that’s not a knock on George W. Bush and it’s not a commentary on any other president, regardless of what party they’re in. We’ve talked about how presidents tend to be the scapegoats when things go bad. They get too much credit when things go really well, and they get too much blame when things go really bad. These things that happened in the country while these people are president, it’s not 100% their fault or 100% not their fault. So to pin all of the stock market performance on George W. Bush or on Bill Clinton or Obama or Trump, it’s not as cut and dry as people like to make it out to be. We always talk about how the market wants one narrative.

The market sold off last week, whether that was because of the election coming up or not. There’s also the point that the market pretty much went straight up from March until September or October. So maybe it just needed a breather. There’s always a handful of different narratives to put on why the market does what it does, and I think assigning the outcome of an election or a political party to one or the other is irresponsible.

Tom Mullooly: It’s weak. Yeah. People don’t buy and people don’t sell all for the same one reason. Everybody’s got different reasons. Okay. That’s going to wrap up episode 330. Thanks again for tuning in, and we will catch up with you on our next podcast.

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