Mr. Lee: Investors need to show fortitude as volatility picks up and not overreact to events in the market.
What can investment managers do? First and foremost, investment managers can come up with ways that help the client to stick to their policy portfolio. So, as an example, they can offer seamless rebalancing methodologies.
Investment managers can be more transparent about their strategies. By this I mean every strategy has periods when the wind is at its back and periods where you're running into the wind. Overall it's helpful to be more transparent about what environments will be challenging for the strategy.
And if they're forthright with the client about this, it's less likely the client's going to terminate them during a challenging period. Frequently, in hindsight, we see that these challenging periods were absolutely the wrong time to terminate a strategy.
Mr. Ehrlichman: Jeff and Tom both make great points. The main thing that both institutional investors and individual investors should do is think long term. The behavioral bias that you're trying to deal with is the recency bias, meaning what's happened recently seems much more important than what's happened over the long term.
Grounding your long-term plan is so important because regardless of what's happened recently, the exact opposite may occur. That gets to the second mistake that investors make, which is ignoring mean reversion.
Everybody develops a balanced plan, and just like in war where the saying goes, 'No plan survives the first contact with the enemy,' in investing, no plan survives a period of underperformance.
Individuals obviously can be a little more emotional, but I've seen recency bias also take over a board of an institutional plan. They move away from a manager or asset class after five years of underperformance that over the next five years turns out to be the best performance. The best thing managers can do is to have an objective and disciplined and consistent process to navigate the market cycles.
A manager who has such a process should thrive in a volatile and emotional environment. And being transparent with clients and consultants — explaining 'Here are the characteristics we build in, this is when these characteristics are rewarded or punished, here is where we are in the cycle' — I find that that's extremely helpful.
It creates a partnership where we're transparent, we understand one another, we have realistic and well-grounded, authentic evidence of when we're going to do well and when we're not.
Mr. Snyder: We too view working with money managers as a partnership. It's important to really get under the hood, understand the process and look for managers that stick to their guns.
Most of the boards that we're working with want style consistency but not all the time. They want to go outside the box when it makes sense but they want a proven process and a process that is repeatable.