Oct

14

 When I meet with prospective clients and talk to them about their portfolio, I ask multiple questions to determine their tolerance for risk.

Three questions I ask are:

"How much money did you lose in 2008?"

"How long did it take for your portfolio to recoup those losses?"

"Was that loss a lot of money to you?"

I've pretty always asked a version of those questions (i.e. prior to 2008 I asked about the same questions about the tech bubble).

As we all know, the market took a massive hit in those years and loses were rampant and widespread.

When I asked those questions in 2009 - 2013 people would regale me with tales of how much they lost (40%, 50%, 60%+). Even people that held a lot of bonds "for safety" spoke of the losses they experienced.

Almost everyone spoke of how many YEARS it took for them just to recover their losses (most took 5 years just to get back to even).

And almost everyone would talk about how the loss they experienced was a LOT of money to them and they'd rather never experience that kind of loss again.

Now, let's flash forward to 2015……And it's a completely different story.

When I ask them how much they lost in 2008, the majority of people say, "I really don't lose much". Some will say "I lost maybe 10% - 15%".

I am hard pressed to find a single person who lost any money worth mentioning.

Further, when I ask them how long it took them to gain back their losses, I hear things like, "Oh, maybe a few months, I really didn't lose much to begin with" or, "I think it took me maybe a year or a year and half".

When I ask them if the loss was a lot of money to them, I hear things like, "Oh, I really don't know, it was no big deal."

What's my point of mentioning all this to the group?

I know for a fact that the rank and file people of the world (the people that I deal with) lost a lot of money in the 4Q07 - 1Q09 housing debacle. I know this because they told me so and they told me they were scared and and that it took them 4 - 6 years just to get back to even and that they lost a LOT of money….more than they were comfortable with.

And now……..they've all forgotten.

Out of sight, out of mind.

All they see (again) is the magnificent rise in the stock market and they all just know that it's not likely to ever correct again in any appreciable way, and if it does, it doesn't matter….it will come back in a very short period of time.

Yes, I know this is anecdotal, but I can tell you that this is based on hundreds of interviews with prospects over many years.

And yes, the story I've written above applies exactly to the experience I had when I interviewed prospects from 2003 - 2007

They all experienced great losses in 2000, 2001 and 2002 that were beyond their comfort zone that caused sleepless nights…..and as time went on, the losses became smaller and smaller and the time it took for the losses to recover became shorter and shorter and the pain they experienced became less and less.

I think a line of lyrics from Paul Simon's "The Boxer" are appropriate here: "A man sees what he wants to see, And disregards the rest."

Ralph Vince writes: 

Great post Scott, thank you.

I'm astounded by this same thing. If you took everyone in early '09 who were upset that they didn't liquidate their 401k plans, etc., the percentage of those who have now is very, very small. Especially in a ZIRP world.


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