When Is “Stay the Course” Code for “Please Don’t Sue Me?” March 16, 2020

Hugh D. Berkson

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Markets Go Up And Down – And They’re Doing That A Lot Right Now

No investor or broker has a crystal ball.  Nobody knows when the market is going to soar, or when it’s going to crash.  While the common understanding is that the markets go up and the markets go down, we’ve seen a significant shift in the timing of those movements since the financial crisis of 2008 and the following market low seen in February 2009.  The bull market that started in March 2009 has been the longest and best since the end of World War II.

And then, staring on February 19 of this year, we started experiencing massive volatility – the type of which we have not seen since 2011.  We can talk about stock futures, or the VIX index (designed to measure the market’s expectation of future volatility), or other indicators of market volatility, but it’s easy to see how those concepts have had a real effect on the markets.  The Dow fell more than 1,000 points on both February 24 and February 27, 2020. And then we saw a gain of nearly 1,300 points on March 2. That gain was followed by a loss of more than 700 points the day following. In the sheer number of points moved (without regard to the percentage of the market those points represent), the February 24 drop was the fourth-largest ever, and the February 27 drop was the third-largest ever.  We haven’t seen movement like that since the 2008 market debacle. The March 2 jump was the single largest point jump ever. And the volatility has continued since.

Your Broker Tells You To Stay The Course

An investor’s natural reaction to the massive market swings is to call his or her broker and demand to sell out of the market, in an effort to preserve the portfolio gains.  And the broker’s frequent reaction to that call is to advise the client to “stay the course,” and not panic. The broker will typically tell his or her client that the market has good days and bad, but by staying invested in the market over the long term, the client will meet their objectives.  The broker will continue, advising the client that missing the best days in the market will invariably lead to disastrous results. The worried investor will hear that missing the best five days between January 1, 1980 and December 31, 2018 would have cost them $232,550 on an original $10,000 investment.  And missing the best thirty days would cost them $534,497 on that same original investment. The discussion continues: since nobody has a crystal ball to reveal in advance the upcoming best and worst days, the best thing to do is stay invested and wait it out.

Staying the course can often be the best course of action for someone with a well-diversified portfolio.  But it’s also possible that the investor’s losses are the result of a poorly constructed portfolio built on lousy advice.  And it’s possible that the investor who needs money in the short term would be best served by selling some portion of their portfolio before additional losses accrue.  The broker is required to give advice that is suitable for each individual client. The advice to stay the course must take into consideration the particular investor’s time horizon, ability to withstand the loss, tax situation, risk tolerance, and other factors unique to that client. 

Should You Listen To Your Broker?

The advice to stay the course may be good for a well-diversified investor with a long time horizon and it may be bad for an investor whose portfolio is fundamentally flawed, or who needs their savings soon.  The investor went to the financial advisor for advice in the first place, trusting the advisor knew more than they did. How is that investor to tell whether he or she is getting good advice to stay the course?  Unfortunately, there’s no magic answer to that question. But our years of working with investors as they try to recover their losses has revealed a number of things that tend to drive those investors to call us in the first place:

  1. The investor has been talking with her friends, who tell her that they’ve seen their portfolios bounce back as the market recovers.  The investor, however, has not seen any sort of meaningful recovery and starts to wonder what’s going on.
  2. The investor sees losses she never expected to see, since the broker told her there wasn’t much risk.  The portfolio simply doesn’t perform as expected and the investor questions the broker’s advice.
  3. The investor gets fed up with the broker’s advice and moves her account to someone new.  The new financial advisor sheepishly (and in a very quiet voice) tells the investor that their portfolio is filled with garbage and the previous advisor did them no favors in building the portfolio as they did.  The new advisor tells the investor they should consider meeting with an attorney to see whether it’s possible to recover the losses.
  4. The investor, for the first time, comes to understand that her portfolio is concentrated in a particular type of investment, or a particular security, and starts to question whether that was a good thing or not.
  5. The investor tries to sell her securities, and is told she cannot since those products are illiquid and nobody will buy them.

The current market volatility shows no signs of ending soon.  If that volatility has caused you to suffer losses in your brokerage accounts, asking why you suffered those losses is a fair question.  If your broker’s answers seem surprisingly vague, or simply don’t make sense to you, getting a second opinion can’t hurt.  

What Should You Do?

A broker’s failure to provide advice suitable to your particular situation is a violation of his obligation to you, and could leave him responsible for losses related to that violation.  Advice to stay the course, if not suitable for you, is wrong. And advice to sell right away, if not suitable for you, is wrong. You may be able to recover your losses that resulted from the bad advice.

Determining whether the broker or firm is likely at fault is not easy.  We review every case carefully before we agree to accept it, and offer our initial review at no charge for our time spent.  Regardless of whether we take the case or not, you won’t pay for our time incurred for the initial review.

You have every reason to be concerned about the losses you see in your account.  If you didn’t think this sort of thing could happen, if your portfolio isn’t performing as you thought it would, or if your losses seem to be unusually large, please contact us.  We’re happy to take a bit of time to talk it through with you, review your documents if necessary, and let you know whether we think there’s something we can do to help.

Hugh D. Berkson is a Principal at the Cleveland-based law firm of McCarthy, Lebit, Crystal & Liffman.

 

While we would be thrilled to work with all individuals, institutions and companies that read our advisories, we  want to clarify that these insights do not form a lawyer-client relationship and represent only general guidance without access or reference to all of the specific facts and circumstances.  If you do wish to engage McCarthy Lebit on a specific matter, please contact us by calling 216-696-1422 or by filling out an inquiry form located here.  If you are already a firm client, please contact the McCarthy Lebit attorney you work with to discuss these advisories and/or the nature of your concern.  In closing, please understand that the law, especially during this pandemic, is changing rapidly and we would recommend that you regularly contact your legal counsel to ensure that your actions are taken based on the most up-to-date versions of the laws.

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