I first met Liz Ann Sonders well over a decade ago. It was in a green room, I believe at the Today Show, but it might have been MSNBC or CNBC (these places all tend to look the same). The markets were roiling and someone, smartly, thought to bring Sonders in. Today, her title is Chief Investment Strategist for Charles Schwab, but I’ve always thought of her as one of the few people in my contacts who could explain the markets – and how individual investors should approach them – in plain English. That’s the conversation we had for this story, and it couldn’t be more timely.
Jean Chatzky: Let’s start with the big picture. How should women today think about investing?
Liz Ann Sonders: My approach personally as well as Schwab’s – toward how investors should think about both the short term and the long term – are one and the same. You have to have a plan. That comes first. Too many investors are just winging it.
JC: What kind of a plan?
LAS: An asset allocation plan. And that plan is going to differ if you’re talking about a self-directed investment account versus a 401(k) that’s managed in a more automatic way. But even with the latter, there’s a need for you to think about how much you want in equities versus fixed income. Do you have income needs, or do you want to maximize capital appreciation? You also have to think about your risk tolerance; which can be guided by past experiences, not just time horizon.
JC: Can we dig into that? We’re in a period where market volatility seems to be ratcheting up.
LAS: You have to understand your own emotional fortitude when it comes to your investments. One of the biggest mistakes investors make, even if they’re trying to construct a long-term plan, is that they too closely tie time horizon and risk tolerance.
JC: You mean, even if you have decades until retirement, that doesn’t mean you can – personally, emotionally – withstand big drops in the market.
LAS: Yes. If you’re going to freak out at an 8% drop in your portfolio, you are not a risk tolerance investor. If you are unwilling or unable to withstand normal corrective phases in the market, that should be reflected in your asset allocation. But you also have to understand that structuring a portfolio that will limit the downside will limit the upside as well. There’s no free lunch. Investors will say, find me something that returns 5% to 6% consistently with no downside. It doesn’t exist—certainly not in today’s investment landscape. A professional will say yes, there is a way to structure portfolio that limits the downside but there are few guarantees in investing.
JC: So, how are you approaching the market today?
LAS: I rarely label myself a bull or a bear, certainly not of the “perma-“ variety. I try to assess risks as I objectively see them. For the past couple of years, we have highlighted the risks associated with late-cycle economies. When we published our 2018 outlook at the end of 2017, our overarching theme was “it’s getting late” [in this economic expansion] and that was likely to change the landscape for the equity market. One of our conclusions was that the era of very little volatility – 2017 broke some records for how little downside we saw in the market – was coming to an end. This was not a run for the hills message, but we noted that we were likely to see more volatility, bigger swings up and down. And sure enough, since the January 2018 high to where we are today, we have had a lot of market volatility, but stocks have made limited headway.
JC: What does that mean for individuals investors?
LAS: This is not a time to take undue risk, and rebalancing can help. There are two benefits to periodic portfolio rebalancing. First, your portfolio tells you when it’s time to do something. You don’t have to worry about which “yahoo” on financial TV made which bombastic comment or sent out which tweet. If a particular asset class has had outsized appreciation relative to others, your portfolio will reflect that with an increase in that allocation. As such, the second benefit is that rebalancing means that if you’re in a self-directed account, you will be buying (or adding) low, and selling (or trimming) high. When left to their own devices, investors often do the opposite. As for your 401(k), rebalancing will be done through dollar-cost averaging.
JC: Are we heading for a recession?
LAS: If the data continues to deteriorate from here, maybe. So far we have a clear dividing line between the manufacturing and consumer segments of the economy. The consumer side is larger and right now it’s fairly healthy. But although manufacturing is a smaller slice of the economy, it tends to lead the consumer side. If manufacturing continues to falter and its weakness begins to spill over into the consumer segment of the economy, recession risk would increase.
JC: Overall, what’s your prescription for women?
LAS: I don’t think there’s much of a prescription difference between men and women. We know that there are a lot of women who have allowed their spouse to handle the household’s finances. To those, our message has been to make sure you have an understanding of how all of this works. Don’t wait until the point where you’re handed control unexpectedly. I have the same message for young people. I can’t believe financial literacy is not a required course – at least in high school, if not even earlier. I made such a pest of myself with school principals when my kids were in high school, urging them to add a required course on what I would call “life economics.” I’m not talking about picking stocks, but about basic money management. I watched my daughter spend three hours drawing a map of ancient Mesopotamia as a high school freshman; yet at that time, she didn’t know what an IRA was or the power of compound interest.
JC: You’re preaching to the choir.
LAS: I know. But developing a keen understanding about investing doesn’t mean you have to do everything yourself. There’s so much more access to information and help available than there used to be, while the fees for investment advice have come down significantly. Most companies providing a 401(k) also provide ongoing investment education and advice. You just have to be tapped in and to stay engaged.
JC: We started this conversation talking about the importance of a plan. Once you have one, amidst so much volatility, how do you make sure you stick to it?
LAS: One of the reasons advisors have clients sign off on a long-term plan is so that they can sit down and remind investors this is why we did it. It helps answer the question: Have your long-term goals and circumstances changed? If the answer is no, then you stay the course. It helps you get through times like early 2009 – the puke phase – where panic ultimately marked the bottom. Having a long-term strategic plan in writing, while remaining disciplined around things like diversification and rebalancing, can at least on the margin help prevent those big, emotional mistakes.