Kitces & Carl Ep 32: Communicating Triggers And Breaking The News That The Plan Has To Change

Show Notes

• Self-Care And Self-Compassion In Times Of Financial Stress And Anxiety
• Markets Plunge. Economies Stall. Panic Spreads. It All Feels Very 2008.
• 20 Years Later, the Y2K Bug Seems Like a Joke—Because Those Behind the Scenes Took It Seriously
• Kitces & Carl Ep 18: Talking Clients Off The Ledge From ‘Scary’ Markets
• Kitces & Carl Ep 26: Talking Clients Out Of The Bunker Portfolio
• Nick Murray

Kitces & Carl Podcast Transcript

Michael: All right. Welcome, Carl.

Carl: Greetings, Michael. How are you?

Michael: Well, doing mostly okay. It's been a little bit of a stressful few weeks. The world is in a global pandemic and it's a little freaky right now.

Carl: Yeah. It's super-interesting, yeah, and really crazy, really crazy. So yeah, it's going to be interesting for us to chat a little bit about how we handle this. I'm assuming that's where you'd like to go.

How Advisors Face Their Own Anxiety As They Reassure Their Clients During Times Of Uncertainty [00:01:27]

Michael: Yeah. We separately did a webinar recently on calming client anxiety of coronavirus. So I thought an interesting discussion today would be calming our own anxiety, right? It's one of those things I don't think we talk about much, this realm where markets are going crazy, the world is going crazy, I suppose like, "These are the times we make all our money. These are when we add our value, keeping clients on board, talking them off the ledge when they're scared, when they're anxious, when they're freaking out."

And nobody ever talks about what happens when we're freaking out maybe on the inside because you can't say that to clients because then you just freak them out even more.

I remember going through this in the tech crash, because I started my career before 9/11, and then probably even more so I remember it in the financial crisis. There were these moments of trying to keep clients invested to stay the course while the financial system was melting down, and it was hard not to have this nagging thought in the back of your head of like, "What if it is actually coming down?"

I was telling people to stay on board because we were going to get through, the system is resilient, then we'll recover, and the economy will grow back again. But it's hard not to have that nagging thing somewhere in the back of your head of like, "Well, unless it doesn't."

And these are never the same, right? History never repeats, but it always rhymes. So last time it was, "I wonder if the financial system is going to survive." This time it's, "I wonder what happens to all of our economies as the pandemic rolls through."

So let me start there, because you've been through this journey as well. Let's maybe start in 2008. As you were going through this with clients, did you have doubts yourself? And how do you handle them, or think about them, or process them, or just deal with them? Because we don't get to talk about it with clients because we're supposed to be their anchor.

Carl: Yeah, yeah. So first I think there are a couple of quick stories and then I think we can get to some really practical things we can do. So the answer is yes, I had massive doubts, which I'm sure we'll have a chance to talk about in another episode, but I was really sort of a crushed human after I got through it.

Part of that was just my own anxiety and fear, and doubts around things, but I think we're now starting to remember what that felt like. If you've been through it maybe... I didn't know of any people actually that were saying it. Now we look back at Y2K and we're like, "Oh, wasn't that cute?" Right?

Michael: Yes. At the time where it was like, "Oh, my God. What if all elevators stop working because the clocks and the floor timers were tied to the wrong number of digits?" I remember this queuing up to Y2K.

Carl: Totally. Yeah. I was trying to explain this to somebody who wasn't even born yet and they couldn't even process it. My point is that I don't think we've gotten to the point yet where we are saying 2009, 2008, 2009 were cute. People who've been through that still have that in their memory.

Here's a story. I remember I had a friend; his name is Brad. Brad had built this business and he had an offer to sell it. Somebody was going to buy it from him and Brad was one of my best friends. I consider him my brother. I had seen him build this business and I had known what it did.

Just those of us who built businesses; sometimes it's pretty intense, right? I'd seen the sacrifices he had made and he had an offer to sell it. And this was in the middle of all this going on. And he called me and said, "Carl, hey, if I sell this, how are we going to invest the money?" And I remember saying, "Man, I don't know." Right? I don't know.

Michael: It was supposed to be the big moment, clients having liquidity events!

Carl: Yeah. And let me be clear. Brad was not a client. So this is a friend who I could say, "I don't know."

Michael: We didn't say “advisor friend” having their own liquidity event?

Carl: No. This is a friend who wasn't an advisor, right? He was building a different business and he was coming to me saying, "Hey, I'm... Obviously, whenever I have money, I'm going to trust you to invest it." And I was saying, "I don't know."

I remember telling my wife that and my wife was like, "Well, wait. How should we invest our money?" And I was like, "I don't know." So where do we go from, "I don't know?"

So this is the other story that I think is really valuable. Dan and Barbara were two clients of mine, and to make a long story short, Dan was laid off because of his age. They were downsizing and he got a buyout. That's what we'll call it, a buyout package. 95% percent of his net worth was in the stock of the company that he worked for when he came to me. It was a substantial amount. It was close to $2 million in the early 2000s and the stock was at $40 without getting into the details of which stock it was, but it was at like $40.

And I said, "Dan, if you're going to become a client of mine, we're going to sell all of that." And Dan said, "Well, why? Because you think the stocks are going to go down." And I said, "No, no, no. Because I don't know. In fact, I would prepare; if we sell, it will double the day after we sell it and if we don't sell it, it will get cut in half the day after we decide not to sell it. But that's not why we're doing it. We're doing it because of our principles, right?" This is all important to the story. Dan, I said, "You can't become a client unless we sell this and we're going to diversify using correct portfolio design principles, not because I know about the stock."

We sell it, and six months later that stock has gone from $40 to $3. Right? And so Dan starts calling me Santa Claus because of that. And I keep telling him like, "Dan, I didn't know. I would have never even wished that to happen. It was just a principle, right?"

Okay. So fast forward, Dan who calls me Santa Claus through every single scary market we’ve had and he would just be like, "Carl, I don't even care...whatever." Scary markets. He was like Teflon from that point on. It was just like, "Whatever." So anything we had happen between Y2K and September 11, as crazy as that was, and all that stuff just didn't faze him.

And then he goes on a cruise in late 2008, early 2009. They leave from LA (which apparently means there were more retired folks?). They get to the first port and Dan calls me. This was with Lehman, AIG – that week. He was on a cruise that week with a bunch of other retired people and he was like, "What's going on? Should I come home?" And I said, "No. Listen, things are pretty serious. When you get home, come meet with me. But just finish... You're on a boat. You don't need to jump in the water." And he's like, "Well, half the people are flying home from the first port." So Dan comes home.

So the reason that all this context matters is because Dan was calling me Santa Claus, right? So this was a big deal. Dan comes home. Dan and Barbara come into my office and I took them through the scary markets conversation that you and I have talked about before. This is the point for the conversation.

I remember looking them in the face and saying, "Dan, look, we're in a lifeboat. It makes no sense. We've kind of prepared for this, but remember, risk is an arbitrary concept until you experience it, right? So all the lifeboat drills in the world – they're good, but they’re not the same as actually getting punched in the face, right? So you're in a lifeboat. The only thing..." After taking them into the whole scary markets conversation like, "Look, it makes no sense to jump in the water. We just need to stay the course." You guys can go review the scary markets conversation.

This is the point for this thing. I remember closing the conference room door and thinking to myself, "Oh, my gosh. I hope I'm right." Right? So there's an internal conversation that we need to be having that we probably do need to keep separate from clients. And in the internal conversation, we need to acknowledge that when we say that cute little phrase where we say the last four words of any great investor, "This time it's different," what we mean is the end is never different, meaning they always end. So far they've always ended.

And so we need to acknowledge two things. One, the beginning is always different. Right? The stimulus for these things is always different, enough that you feel like...

Critical Events Precipitating Client Anxiety May Always Start Differently, But They Have Always Ended The Same [00:11:05]

Michael: Right. This time it's coronavirus pandemic. Last time it was a financial system meltdown from the mortgages. The time before that it was 9/11 and the tech boom and crash, then it was algorithm trading in '87. It was an oil crisis in '73. They are always different.

Carl: They're always different.

Michael: The precipitating thing that at least sets off the chain reaction is always different and, right or wrong, the presumption is always, well, it's going to end the same and the ending is, "We get through this, things get growing again, scary stuff eventually ends, and then we move on."

But as you said, there's this lingering thing, right? Clients have this lingering doubt, "Okay. But what if it actually is different?" And right or wrong, true or false, we'll see. That seed gets planted in our own heads as advisors, like, ''Oh, my gosh. What if it is different this time?"

Carl: Yeah, yeah. And I think there are a couple things that are super important. One is that the beginning is always different enough to make you feel like it's unprecedented. We've never seen anything like this before. That's always true.

So it feels like, yeah, in the middle of 2008 and 2009, we weren't just talking about, "Oh, it's scary." We were talking about things we never heard of before, the credit default swaps and who knows? And people didn't even know how to explain it. It's always different. So first, we need to feel that, "Okay. This is different. It's okay for me to be scared because this is unprecedented. We've never seen this before."

Number two is the idea that it will always end. We just need to acknowledge that that little creeping doubt... We weren't basing this off 95 years of stock market data. Right? And then you want to go back a little bit further and say, ''Oh, no. I'm not. I'm betting on the concept of capitalism." Okay. That's fine too, but the concept of capitalism...when we talk about the window of human history, we're still talking about a relatively short time period.

Michael: Okay. You're ratcheting up my fear here, Carl.

Carl: I know, I know. It's on purpose. We need to at least acknowledge that that is uncertain, but what do we do? So here's the solution my head. The way I go through it is believing that this time, the ending is going to be different. Even though it's a possibility, I think acknowledging the possibility is important. Not externally, internally between us advisors, it's important for us to go, "That feeling I'm having, I need to acknowledge that, right? I need to find a safe space to talk about it."

But just because something is possible doesn't mean it's likely. Right? So the only thing left to do is live in this uncertainty and say, "Okay. How do I make a decision? I've got to rely on the weighty evidence of history." It would be unreasonable to assume that this time is going to end differently because the only precedence we have that we're making all these decisions on is that you know what? We get through these, we figure it out, and we get through them. Right?

Michael: Well, it strikes me as well. I remember particularly going through this in 2008. It was different to me when the tech crash happened and 9/11 happened. The actual stock meltdown, well, for the tech crash was fairly confined to tech. Granted, everyone was obsessed with tech and they wanted to put all their money into the Nasdaq cubes instead of broad-based portfolios.

So people got to concentrate and portfolios got hammered a lot harder. But broad-based portfolios held up quite well. Heck, small cap value even went up while all the rest of the market was melting down because it had been so neglected in the late '90s.

Even when 9/11 happened, I felt there was this reaction in the country of, "We got hit. America is strong. We'll bounce back." There was such a surge of patriotism that I felt this acknowledgment, "Yes. We got hit and this may have done some economic damage, but we're better than this. We're stronger than this. We will power through this." And the surge of patriotism that came to me, I never had doubts in 2001 going through 9/11, of, "Would markets be okay? Would the economy be okay?" Yes, terrorism has hit home. Our lives have changed." We haven't gotten away from TSA since. But there were never doubts for me in telling clients that they needed to stay the course, about staying the course.

2008 and 2009 to me felt different, right? Even as participants in the financial services industry, we were seeing things that we had never seen before. Institutions that we were accustomed to, even within the industry, were suddenly disappearing and vanishing. Organizations that had been around for a hundred-plus years were suddenly vanishing basically overnight.

I remember conversations with clients of the firm in the fall of 2008, trying to keep them on board, and all the same stuff – this too shall pass, let me pull out the charts, here's how long it typically takes for recovery and bounce back periods – all that stuff that we try to do to anchor people. But I'll admit for that one, that nagging fear in the back of the mind was definitely there like, "Man, I hope this is actually true because if it's not we're all kind of screwed here."

The irony to me, at least with the nerdy logical rational brain that I have, frankly, was that it was kind of a comfort in some ways. It sort of reminds me of the bunker portfolio scenarios even before the coronavirus. The folks that want to buy 100% gold because they think the whole economic system is going to melt down someday for all the various reasons that they think the whole economic system is going to melt down.

There was always a piece of those scenarios of like, "So what exactly are you going to do if it really melts down? Are you going to chop the gold with your knife?" You really need guns and food storage. And even that's only going to last you so long if literally the whole economic system has melted down.

There comes a point where I feel like you have to keep powering forward not just because the alternative is too awful to contemplate, but because there are no tools for the alternative where you're like, "We can talk about gold as a hedge, but if you really want to blow up the entire economic system, gold ain't going to cut it." That actually still assumes there's some foundation of government and systems that cares about gold and the interchangeable nature of commodities as opposed to just owning hard goods.

It's not exactly the same, I think, for this coronavirus cycle. But the more it grows, the more it compounds, the more these discussions of sadly how many people may die, how much loss of life there will be, how much permanent harm we are doing to the economy as travel starts grinding to a halt and business starts grinding to a halt. These questions start surfacing again like, "What if we don't come back from this?” or “What if we don't come back in the same way that we have all the other times that terrible things play out?"

But I still keep coming back to some combination of, okay, well, we actually still have some historical precedents for this like the Spanish flu. And yes, eventually, the world did come back and it did grow again. We still get through this. We're not quite at the 12 Monkeys level and I don't know what the alternative would be anyway.

There comes a point where you may as well bet on the system recovering because none of our bets really matter if you think it's not going to. It's sort of a Pascal's wager. Do you want to bet that God exists or not? Not to go into an entirely religious direction here, but famous philosophy wager around should you bet that God exists or not. And it essentially comes down to well, you may as well because if you're right this is going to go well for you and if you're wrong this is going to go really bad for you. But if God doesn't exist, you're not giving up much by betting he does. So you may as well go for it.

I feel like there's a similar thing that comes forward, but even that to me still leaves this lingering doubt. It means that we're sort of assuming this blind confidence for ourselves. I'm going to tell clients, “You gotta keep going, it's going to be okay,” even though I'm actually not sure deep down it's going to be okay because I don't know where else I could take them anyway. So we may as well keep going down this journey together and we'll all collectively pray it works out.

Carl: But here's the deal with that. Right? So number one, what are you going to do anyway? What are your alternatives? That's the way I always think through it. What are my alternatives? Okay.

Number two, the only rational conclusion based on the weighty evidence of history – at least the piece of history we're using – the only rational conclusion is that we'll get through this. Right? And we just have to remember that humans are uniquely qualified and really good at dealing with problems right in front of their faces. Right? MacGyver bubble gum and duct tape style. We'll figure this out. I don't know, but we'll figure it out. Right? We're terrible at understanding what's going to happen two weeks from now.

What has Nick Murray been saying? Optimism is the only realism. Being irrationally optimistic about this is the only thing to do and it's actually that “We'll figure it out” has been true. So I'm totally cool with assuming otherwise. If I had a bunch of data that told me that, "Oh, you know what? It actually turns out 50% of the time, we don't figure this out."

But so far and what I'm talking about figuring out is the capitalist system speaking broadly. I have no idea. If you own individual holdings or you've made bets on Bitcoin, or you bet on whatever else, gold, any individual, I have no idea. I only know how to handle this: when I've got a broad-based globally diversified portfolio that's aligned with what I said was important to me. The reason my money is invested that way is because it gives me the greatest likelihood of meeting my goals based on the weighty evidence of history. That weighty evidence of history included the idea that we would have markets like this (in air quotes).

We didn't know when, we didn't know how, but we knew they would come and we're not even... Where are we, 25? As we're speaking I don't know what the numbers, but we've crossed into bear market territory. But we're not down 50. The S&P 500's not ... The Nasdaq's not down 82 or whatever it was in 2002. Right? And I'm scared to death. I'm talking right now as if I'm not, but, of course, I am. I'm human. But this is the dialogue we have internally.

And then there's one more piece that I think is useful for people to remember. So now let's talk a little bit about how you would feel it out with clients. There are times when overconfidence plays a productive role, where overconfidence becomes a tool in a backpack, right? And I can't find the reference, but somebody told me about the role, the sort of research that had been done in military science around times where you have to look people in the eyes even though you're not sure yourself and say, "It's going to be okay."

I've been in places like that in the woods in some of the adventures that I do. I've been in places where I was, "I'm not sure exactly this is going to work out." I was the leader. I couldn't look at the other people and go, "I'm not sure this is going to work out." I had to look at them and say, "I know you're freezing. I know you're cold. I know that's a really scary place to go, but listen to me. We've got to go there." Right?

So, Dan and Barbara, that's what I had to do in that meeting. I had to say, "Okay, look. I'm not sure. We're in uncharted territory. I can acknowledge that. This field is crazy, but Dan and Barbara, I can't think of anything better to do. We built this portfolio based on your values and goals. We're broadly diversified. We followed all those principles. We got low-cost investments. The investments are working like we expected them to work in this environment. Right? There's nothing broken there. There's no fraud. I can't think of anything we should do differently," and then I have to walk out and go, "Oh, gosh. I hope I'm right." Right? That's all we can do.

If there's something better to do, tell me, but I can't think of something better to do. And we might be wrong. But to assume we're wrong would be to deny the weighty evidence of history. How about that?

How Advisors Can Use (Rational) Overconfidence As A Powerful Tool For Effective Leadership During Difficult Times [00:25:21]

Michael: It's an interesting point of just how we talk about these as behavioral biases, all the negative implications of behavioral biases, which overconfidence is always one of the big ones that's out there. But yeah, I think you sort of indirectly make a good point. There's a reason why this behavior got naturally selected for that, right? If it was actually counterproductive to our survival, the people that carry that trait tend not to survive. There's a reason this is honed for us and I think you make a good point. Right?

Take it out of modern environments and back to our roots just a few thousand years ago. Almost everything in the world was scary uncertainty. We didn't know how anything worked and every day was just survival mode with the herd, right, with fellow humans, where someone was the leader leading the herd. And you needed a confident leader, and the leader may or may not have actually known what was going on. But someone has to lead and you have to lead confidently or people don't follow. Right? It's one of the first things you discover. I still remember as a parent early on, learning that lesson that if you see your child fall and get hurt and you rush them upset that they got hurt, they just get more upset because they see you're upset.

If you want to calm a child when they’ve gotten hurt, when something's happened, you have to be calm and exude the calmness, and they feed off your calmness. And it helps to settle them down even if you're still thinking about it in your head like, "Oh, my God. Did you just break a bone?” How about, “Is she hurt? What just happened?" Right? All those thoughts are rushing in your head as a parent, but you have to exude the confidence because it helps the other side even when you have the doubts or the worries in your head.

I think there’s a striking similarity; there’s a striking parallel here to me. It's just recognizing that it's okay to be confident. It's okay to be overconfident. It's okay to be irrationally overconfident sometimes. And you can still recognize that you might be wrong in the back of your head. Right? We don't know these things. We don't know the future. I cannot unequivocally know that this time won't be different and if it will end the way it was kind of differently leading in. But at the end, I've got a role to play in trying to transfer that confidence to my client, which means even if I've got doubts, I need to carry the overconfidence. That's part of the burden we bear.

Carl: Hey, Michael, one quick thing I just want to point out is it's not irrational overconfidence that we're talking about, right? Because we've already said the story; so yes, it's overconfidence…

Michael: It's rational overconfidence.

Carl: We're not talking about a leader who's going to take the whole world down in flames. I don't want you to run with me off a cliff. What I'm saying here, based on everything I have, the course of action here is still uncertain, which is me acknowledging the reality of uncertainty internally and then saying, "We don't know."

And in the face of that uncertainty, this is a little different than a critical care doctor that looks at somebody knowing that person is going to die, but saying, "You're going to be fine. You're going to be fine." Right? This is different than that in the sense of this is a critical care doctor that's more like, "Well, this is touch and go. I don't know how the situation is going to work exactly, but I've been through this a couple times before. And I think there's an 85%, 90%, 95% chance that if we get this person in the hospital quick enough they'll survive."

They're not going to talk to the patient, and say, "I think there's an 85% chance that you’ll be okay... But there's still a 15% chance you're going to die." They're not going to say that. They're going to look at you in the eyes... This is what we're talking about here, right? This is rational overconfidence. They’re going to look at you in the eyes and go, "You're going to be okay. Stay with me. We got you." Right? That's rational overconfidence. I don't even know if it's the correct way to say it, but that feels different to me than like, "Follow me. We're going." It feels different to me than "Braveheart" – against all odds and it will happen to work out. Well, if this were against all odds, we would be making a different decision right now.

How Advisors Can Deal With Lingering Doubts Even While Reassuring Clients [00:30:05]

Michael: So I like the framing of rational overconfidence. But I guess as we wrap up, the one other question I'd put back to you, Carl, is just how do you handle, how do you process, how do you quell the doubtful thoughts that still sit in the back of your mind as you're trying to have that conversation with clients?

I think some of us, maybe more than others, but all of us, at some point, still come back to the thought of, "Man, I hope I'm right about this, but I'm not sure."

Carl: Here's the tool I wish I would have used in 2008 a little more explicitly. I was doing it in my head, but I didn't realize I was doing it. And it's what I do now. Write yourself an argument. Pretend like you've got to convince a court, a jury, of the position you've taken. Get it written out; it should just be one page, right, with a Sharpie even. That's the level of resolution I'm talking about.

So you just go through like, "Here's how I've made this decision that the best course of action right now..." You're dealing with a complex adaptive system, right? It's changing. New information's becoming available. So you're going to have to keep updating this thing.

But I think you write out, "Here are the principles. Based on the weighty evidence of history, da-da-da-da-a. I recognize that this time the beginning was different." And at the end, you come up with this conclusion that, "Based on all of these facts, the only reasonable thing I can think to do is to stay the course because of all of this."

Then if you have that written down, keep pulling it out, right? Just use it as a touchstone because what happens is you swirl and you lose track of what you're even swirling about. And then you can go, "Wait, I've already made this decision" You can pull that document and go, "Is there any new information that requires me to change what's on this document?" Because if you keep that touchstone there and keep going back, you'll catch yourself. You're going to still do it 50 times a day. Right? You're going to wake up early and see how Tokyo opened or whatever. Right?

But if we can get to the point where we can take ourselves back to breathe at a touchstone, the things that we can control are on a piece of paper and then we have to let go of the rest. That's it. Right? That's all I've got. I've been thinking about this for a decade. That's all I've got.

Michael: Yeah. And for me, I think it really comes back to this fundamental challenge. I don't know what the alternative is that I would plan for anyways. There comes a point where there is no Plan B. Right? Markets may go down, they may go down a lot, and they may go down a lot, a lot. Some people may die. A lot of people may die. The economy may go down some. The economy may go down a lot. Heck, take it back to the Great Depression when the market crashed almost 89% from top to bottom – and we aren't even that bad yet. We've had such horrible stuff, but at some point, humans move on and adapt. The system adapts. We start growing again. We move on to new opportunities and new highs because if the whole system just fundamentally breaks, I don't know how else to plan for that anyways. And not to be totally morbid about it.

It's amazing how adaptive the system can be even in the face of horrible, horrible stuff that has happened historically. But there comes a point where I feel like you have to power on with that belief, with that rational overconfidence framework, because I don't have a solution for the alternative, "What if the entire system stops functioning?"

Carl: Look, I know we have to wrap up, but here's one mental framework I use, around that exact thing. I would literally get down and say, "Okay. Great. Let's go that path.” Right? So then you go down the guns and butter path, really. If we go that path – I used to have this conversation with clients. "Let's just explore this together." Right? "If we go down that path, what would be the reasonable portfolio? What would be our conclusion portfolio?" So let's just go with guns and butter. My clients would say cigarettes and powdered chocolate. Somebody said powdered chocolate. She's like, ''That way I can trade with all of you people who just have powdered milk; it tastes so gross."

Anyway, guns and butter; then the framework I used was, “Okay. Guns and butter would be the appropriate portfolio in that environment.” And then the question that I found really helpful to myself was what percentage of the time in the history that we're dealing with, modern markets history, what percentage of the time has guns and butter been the appropriate portfolio? Zero? Maybe if you've dealt with days? Like, "Oh, yeah. I could pick out a few days where it would have been..." But mainly it's zero. Do I want to make a bet on zero?

That's how I would get that. I realize the odds. Maybe it's 5%. Do you want to make a bet on 5% or 95%? In the end that's where we get to be rationally overconfident. Just the odds are in your favor of saying what you said, which I think we've got to remember. It's unbelievable how good humans can be at adapting and making something work, at figuring things out. We've gone through way crazier stuff and we don't even know what the role of the massive amount of news, social media, the stable market we've had, politics, and nationalism. And you mix all that in and it's, "We'll figure it out. We'll figure it out." So anyway, that's all I got for you.

Michael: The takeaway to me: it's okay to be rationally overconfident. It's the reality of our role in trying to lead clients that sometimes as a leader, you have to express a rational level of overconfidence, even if there are some nagging doubts in the back of your mind, and it's okay to have the doubts.

That doesn't make you a bad advisor or a lesser advisor. You can acknowledge the doubts and recognize that you have them. And then do what you need to do to help move clients forward.

Carl: Yeah. I'm fine. I know we'll record another episode about this probably, but just on that little note, just find a place where it's safe for you to have those doubts. Right? Whether that's a paid place or a friend, you gotta have a place that's safe to have those doubts where you can just go, "I don't know."

Talk it through. Hug it out. Well, don't hug it out right now. Air hug it out and then get back to being irrationally overconfident because we need you. Right? We need you, and the people need you. So thanks, Michael.

Michael: Thank you, Carl.

 

 

 

 

 

 

 

 

 

 

 

***Editor's Note: Can't get enough of Kitces & Carl? Neither can we, which is why we've released it as a podcast as well! Check it out on all the usual podcast platforms, including Apple Podcasts (iTunes), Spotify, and Stitcher.

Show Notes

• Kitces & Carl Ep 18: Talking Clients Off The Ledge From ‘Scary’ Markets
• Kitces & Carl Ep 30: Conveying Rational Overconfidence In Talking To Clients About Coronavirus Fears
• Dynamic Retirement Spending Adjustments: Small-But-Permanent Vs Large-But-Temporary
• Monte Carlo Investment Assumptions In Your Retirement Planning Projections
• #FASuccess Ep 109: How A Retirement Researcher Implements Retirement Planning For His Own Clients, With Jon Guyton
• 2020 Science of Retirement Conference
• MoneyGuidePro Play Zone
• eMoney Decision Center

Kitces & Carl Podcast Transcript

Michael: Greetings, Carl.

Carl: Greetings, Michael. It's hard right now to ask, "How are you?" Because you really want to follow up with, "Really?" And then we're into a 20-minute conversation, which is not the point of this podcast, but I hope you're well.

Michael: Doing well. Doing well. I think we're all kind of at various stages of collective lockdown around the world. Reality for me, as conferences started getting canceled, my travel schedule kind of lightened up anyways. So in practice, I've just been holed up working from the home office for a while now because I don't really have other places to be at this point.

And all the rest of my business work has already been virtual. So ironically, work from home was not the disruption for me because I ran the business largely virtually in the first place. But being home has certainly given a little extra time for conversations.

Carl: Yeah, for sure. For sure. Yeah, I'm finding the same thing, I freed up some travel, the positive spin I'm putting on all this is that it opened up some time to get to some things I've been putting off: balancing books, opening a new bank account, reviewing some legal things, whatever, and creative projects that I've been wanting to do and didn't have the space. That's my positive spin.

Michael: Yeah. But I feel like there's still this weird dichotomy that home life has sort of been oddly lifted by this, right? Like, when none of the kids' activities are happening, we're all home. And as you were saying, we can actually start doing some of these projects and things around the house that were things we would always get around to, but we never managed to get around to until you're basically not allowed to go out and do anything else.

And all of a sudden, there's a lot more time to do these things. But weekdays to me, just during the workday I find is just, I feel like we're all collectively living on Zoom or GoToMeeting or whatever your video conferencing tool of choice is now; internal business meetings, client meetings – I feel like I'm having more conversations now even than before because we're all relegated to this one conversation medium, trying to stay connected as best we can.

Carl: Yeah, it is really interesting. Lots of dichotomy around all that. Tons of time with the family. Oh, no – tons of time with the family! Like, tons of opportunity to connect. Oh, geez, I'm overconnected! It's a fascinating time, fascinating time. Speaking of fascinating times, I wonder if we should chat a bit about maybe some of the conversations that are either happening or going to be happening, right?

Michael: Yeah. Just the way this has played out with the market decline, just having been through these cycles. I started my career on the eve of the market crash, the tech crash, and 9/11, a bear market during my first few years in the business, went through this in the financial crisis as well.

I find there's this pattern that kind of plays out with client conversations. That when bad stuff is happening and markets are down significantly, you get these like 30%-plus declines, first of all, clients start imagining like it's going all the way to 0. So then we have to educate like, "No, it's not going to zero, but it is a pullback. This is a significant recession. Let me explain how these work and how they can recover," and just kind of give context for it.

But then this quickly comes back to what everybody really wants to know at the end of the day, which is, "Am I okay? Are my goals okay or are they not?" And I find in practice, the way these conversations usually turn out is, it's moderately bad. And it's kind of like, "The good news, it's not horrible. You're not going to be destitute. This isn't living under a bridge eating dog food. But this has been a big pullback. We're probably going to have to make some adjustments to stay on track."

And I thought it would actually be interesting to talk about today; how do you break moderately bad news? Right? Like, "You're going to be okay. It's not all destroyed, everything is not over, but you're going to have to make some changes. You are going to need to tighten your belt or I need to counsel you to tighten your belt." Ten percent pullback, sometimes clients overreact, but when you get pullbacks this big, yeah, we published some of the research around this as well, and sequence risks, making some modest adjustments help. So how do you have these conversations? How do you break this news, "It's not as bad as you think, but it is bad and we need to make some changes?"

Breaking The Bad News To Clients When Their Financial Plans Need To Be Adjusted [00:06:28]

Carl: Right. So to have this conversation, I think we should make clear, we're making an assumption that we're talking to that group of clients. Because there are some clients that are like, this is pretty bad, right?

Michael: Yeah. If they were overconcentrated and they held everything in hotels because they love the hospitality industry, we're at another level of problem here.

Carl: Or they own seven restaurants or whatever. So let's assume we're talking to this group of people who are like, "We had a plan and now the plan..."

Michael: We had a plan, we were invested, we were diversified, the market still had a hellacious decline. This hurts. What do we do now?

Carl: Yeah. Yeah, I think there's some really important stuff to talk about in terms of our own mindsets first. So, first of all, it feels to me like this is the right time to be having this discussion because it...and who knows how long these things go on.

Obviously, we have no idea as we're recording this, but there's this initial shock of just like, "Stay put, stay put, stay put, stay put." And then it's like, "Okay, come in and let's assess this. Let's have a conversation about what's going on." And as we're recording this, we're getting to that spot. And again, I'm not assuming that the market has declined. I have no idea about that. I'm just saying we've had enough time now to get our feet under us. And now we can say...

Michael: Yeah, the shell shock has worn off. We've done the initial round of like, "Don't panic-sell. We're going to try to stay the course."

Carl: Come in and let's talk.

Michael: For better or worse, people have adjusted now to just, the market is down a lot. It's still volatile. Scary stuff still happening, but we're going to get through this at some point. And I think you put it well, like, once a little time passes, right, the brain starts to shift. At some point we're just trying to figure out, so what do we do from here? And those are the calls, at least, that I'm hearing more now in the firm.

Carl: Yeah. Exactly.

Michael: We're past the “Talk you off the ledge” stage. The new round of scary stuff always ticks off a little more. But we're mostly past the talk you off the ledge and now we're just into the, so what's the damage? What happens now? What do we do from here? And the answer I'm assuming for a lot of clients is, we're probably going to need to make some changes.

Carl: Yeah. Yeah. So again, I think...given all those assumptions, I think the really important thing to do here is just start with a mindset that there's an initial...there's always like, I'm hearing it a lot right now, this sort of feeling of guilt or like it's your fault or you're embarrassed or you did something wrong, right? And all of those things, especially the audience we're talking to, that's not true, right? Like, you did good quality planning. And if you didn't, again, that's a whole different discussion.

You did good quality planning, and these things happen. You knew they would happen, you didn't know when. And again, setting aside for a minute the argument about this time it's different, whatever, like, you knew this would happen. So we need to sort of walk in and realize, I think we should kind of fire ourselves. I'm firing everybody from the job that we thought we had, where it really felt like we were defenders of a map, right? Like, we were defending a plan. And so, therefore, if the plan was wrong, we were wrong. And I think the job we've had all along but particularly we've been thrust into right now is really more like a guide in a changing landscape with the tools to help you make decisions.

And so if you come into the meeting with that approach instead of sort of with your tail between your legs, "I'm sorry, we made these mistakes." More of like, "Hey, things are a little tricky." Because you know what's scarier than being in an uncertain environment? If you're on a guided trip with somebody, if things go a little sideways, you know what's scarier than things going sideways? It's seeing your guide scared, right?

There's a fine line between being empathetic and then transferring your own anxiety to the client. And that's all I'm saying is you need to get that mindset right first, which is, "Hey, look, we've had some disruption here. It's a little crazy." You can use whatever. Like the flight plan, turbulence, the mountain guide, whatever analogy you want. "But I'm here, got these tools in the backpack, we're going to figure it out. So why don't you come in? And how about next week, we'll come in and we'll sit down." And then when we sit down, we just have those.

And I'm hoping, I'm making some assumptions again, that there's been some pre-commitment, there's been some maybe lifeboat drill conversations around the levers that we have to pull, right? Because when these things happen, we all know the levers to use to get a plan back in target range. Particularly if you're using Monte Carlo work, we know the levers. And the lever we all seem to rely on the most is asset allocation. Like, we'll just increase the equity exposure. But there's great research I saw last week actually at Abraham's conference here in the UK two weeks ago around the last thing you want to do is change allocations, right? With the very easy...the first...the easiest lever, of course, is just die a little earlier. I'm just kidding. Like, can we just move the date for making the plan look better?

Michael: Shortening the plan time horizon does make the plan look better.

Carl: No, that's one of my favorite financial planner jokes. But really, it's contributions and withdrawals, right? Like if you're in withdrawal stage, can we... And a lot of the work you've done and Jonathan Guyton's work, all the guardrail work, those conversations in some form have taken place, hopefully. Does that make sense?

Michael: It does. And I like the positioning and framing of just being proactive with clients to say, "Look, we had our plan, plans change, life changes and plans have to adapt. So good news, I'm still here, I'm still ready to work with you. Let's sit down together and we're going to figure out what changes need to be made or not and how to move forward from here." Right? And just putting yourself in the position to say, "I'm your guide, I'm here with you, we're going to figure this out together." Which is I think both positive for looking forward and just shifts what I know is the conversation that crops up with some clients. I've been on the receiving end of it as well, where they want to blame you. Like, "You said I could retire two years ago and I did and now look at what's happened."

The Importance Of Strength and Empathy In Good Leadership [00:13:46]

Carl: Yeah. Yeah. And again, it may be that we're a little...it may be the way we've...which is why we've been talking about this shift from plan to planning for so long, right? Like, these things are easier if you've had these conversations. So we're sort of talking as if we're assuming that those conversations indeed had to happen. And we can talk a little bit that they haven't later.

But yeah, I think it's even...that's what it means to be a leader. That's what it means to be a guide. We had this conversation around rational overconfidence. And imagine an emergency room doctor or a critical care doctor looking somebody in the eyes and saying, "Look, things have changed, but you come with me. We're going to figure this out. That's my job." Now, when they get mad at you, which happens, I've been on the receiving end of those too, it's really just got to be empathy, right? This look like I'm washing my hands. And I don't mean it that way. I mean like...

Michael: So how do you handle that conversation?

Carl: Yeah, if somebody is like, "Well, jeez, you told me."

Michael: Carl, you told me we were going to be able to retire and now look what's happened. You've destroyed my family's livelihood.

Carl: Yeah. So there would be two ways. One would be to defend. "Nobody knew this was coming. We built this plan and look, da, da, da." The other would be to say, "Man, Michael, that sounds like...now I understand why you're so scared about this. So we have a couple of choices here. Let's dig in. And I apologize if I ever communicated to you that the plan was set in stone." Right? And then I would go back to the flight plan analogy.

Like, "What we have here with a plan is a flight plan, but when turbulent air shows up, we've got to make course corrections. And sometimes we get to make course corrections when we get there faster than we thought." Right? And if you have some track record there, you may even want to talk about it. "And sometimes we have to make course corrections because things got choppy superfast. But the point is, you and I are still sitting in the pilot seat together, in the cockpit together, let's grab the controls and get after it. So let's walk through a couple scenarios." Right? So I think there's an element of empathy and then strength that's got to come because you can't get defensive because that won't work.

Michael: I like that framing. So just, "Carl, what have you done to me? You told me I could retire and look at this." So you're in immediate with, "Wow, I can understand this. This is probably really scary for you."

Carl: "Scary" is the word I like to use, but it could be like, "Yeah, man, you're right. There's a change. This is painful. It's hard."

Michael: And then trying to move it forward. So, "I apologize if I communicated the plan was in stone. These have to be dynamic, but I'm here with you in the co-pilot seat, let's get in here and figure out how to fly this thing forward because we just got some really bad turbulence."

Carl: Yeah. And in that moment, you get to decide like... I always am playing chess around like kind of a...I always joke, like a punch in the face or an empathetic hug in terms of what kind of leadership somebody needs. But I think in these cases, it's not a problem to come in pretty hot after you've been a little empathetic and say, "Look, we're going to get through this, brother. Like, you, me, and I've got the tools, we're going to get through this."

And if it got even further, like, I never...I would rather...instead of being defensive, I'd rather come on strong as a guide and say, "Look, my friend, I know you may be mad at me. I know we may be mad at the market, we may be mad at the circumstance, and we may be mad at all this stuff. And I get it. And there's time for that.

If you need to go outside..." I actually said to a client once, I'm like, "If we need to go outside and go a couple rounds, we can do that." Just sort of joking around. Like, "If it would help, we could do that. You can go to the gym whenever. But the last thing I'm going to let you and your family do is jump out of this lifeboat into the water. It's not going to happen on my watch. So let's get after it. I know better than anybody you could find on the planet how to guide you through this situation because I know you and I've got the best tools. And the stuff I don't know the answers to, I've got a phone, and I can call...I know people to call. So let's get to work." Right?

And again, we just went through a bunch of different stages of that, right? But you're the one that has to play that chess match with how strong you come across. But my point is, go in there as a leader, go in there as the guide. Go in there with a little bit of rational overconfidence, a lot of empathy. Take the blows, right? Like, they don't really think that you were the king of the world and had carved in stone from the mountain exactly what was going to work for the rest of your life, right? They're just a little mad at you right now.

So then what do you do? Right? Well, pre-commitment conversations. Like, "Hey, remember, we talked a little bit about this, that there would be some course corrections. And when we did, we have a couple options here." Right? And then you get to walk through could we...based on whatever like withdrawal, safety, sort of prudent withdrawal rules or guidelines or whatever work you follow there, "Look, could we cut back a little bit? Could we increase equity exposure a little bit?" Even though I think that should be the last thing you do, based on the research I just saw, increase equity exposure a little bit. Can we cut back a little bit? Can we put off that...you had that trip planned next week, or sorry, you had that trip planned six months from now.

Michael: Well, I was going to say next week, you probably won't get to go anywhere; let’s wait until six months from now.

Carl: Yeah, you've already canceled. Yeah. No, you could say that, "Good news, good news, all that stuff you were planning on spending money on and it's been canceled. We're fine."

Michael: Yeah. And ironic, but there's...I think there's really some truth to that, that, right, a lot of budgets are adjusting naturally. Just with so many people having spent time or still in work from home shelter-in-place environments, like, spending tends to go down.

We can try to order more from Amazon and delivery, but our consumption tends to go down. When we're not able to be out and traveling and doing the activities that we do, it actually naturally starts to rein in spending a little.

Carl: Well, and I think that's why the word you used "dynamic" is so important, right? That's exactly like, who would have ever thought that, that I'm living off my Social Security and that I've got a little pension, and then I'm pulling some money out of my plan with you, Michael. Jeez, yeah, we are not spending as much. That's called dynamic.

Small Permanent Changes Are Often More Effective Than Drastic Temporary Cuts [00:20:37]

Michael: Yeah. Well, and the irony to me as well, we published a lot of research around this that we're also just really bad at figuring out what it takes to get us back on track. I find clients, well, either they sort of want to deny the reality and they don't want to make any changes and we have to break the news to them like, "Yeah, we're going to have to make some adjustments," or they go the other end and they go too extreme and it's like, "Okay, we've got to cut all of our spending, we've got to sell our house, we've got to make all these drastic lifestyle changes."

And the reality that we find is just, even when you go through significant pullbacks like this, so as I call them, like, small but permanent cuts are actually way, way more effective than drastic temporary cuts. Like, the go-to for most people, like, "Okay, we're going to...market is down so much, we're going to cut our spending by 30% for the next 2 years. We're going to really tighten our belts and try to rein it in until we get back on track." But when we look at the research on this, what I find say like, "Here, let me give you an alternative option. Don't take your inflation adjustment this year." Which for most people is like, well, that's nothing.

Carl: What are you talking about?

Michael: We're like, "Okay, well, that's 2% or 3% of your spending. But if you remove that, that means not only do you spend 2% or 3% less this year, that means your baseline spending is now lower for every year in the future. Which means if I trim your spending by 2% or 3%, that cuts 90% of a year's worth of spending over the next 30 years. It's 3% a year added up for 30 years. If you cut your spending by 30% now for 2 years, that only trims out 60% of a year of spending. It's like, you actually cut out more by doing a 3% shift you'll probably hardly notice than a drastic life-changing 30% for 2 years waiting for things to get back on track again.

Carl: Totally. And that's purely just the impact of compounding, right? And I remember this so clearly in 2008/9 meeting with some clients. We plugged in the numbers. And we were using a Monte Carlo tool at the time and they had gone from like 92.7 to 89. You know what I mean? Yeah. And then we were like, "Wait, if we just make an adjustment like that, could you just not take your inflation increase for the next couple of years as long as this..." One of the old like, if markets are down, you don't take the inflation increase, if they're up, you do.

And then the thing to remember too is, just like we're making this adjustment on the downside, we're going to have this meeting, again, positive surprises happen, we're going to have this meeting again sometime, I have no idea when, where we're going to say, "Hey, we could afford to give yourself an inflation adjustment or we can give you a small raise now." Right? And I think we're just managing in that range when you're talking about 20 or 30 years, right?

So that's exactly what I would do is I would greet with empathy, be a leader, and then get down to brass tacks the work that you do. Like, "Let's talk about real specific things that we can do right now. Look at this impact." And by the way, my experience has been exactly yours. There never is...in this category of client that we're talking about, there never is big and drastic as we thought. It might still be painful. We don't want to downplay it. But you're taking the controls at that point and saying, "Look, here's things we can do." Things that you're in control of. That sense of control...

Michael: Well, and that to me is the part that's powerful. Like, "Let's get away from the part we can't control, which is what the market does or did to us. Let's get back to the stuff we can control. How are we going to change our spending and behavior to make sure that we stay on track? And recognizing it might actually not need to be as drastic as you fear." Right?

I know just people who are like, "The market is down so much, I'm afraid to take the same spending from my portfolio." I'm like, you're spending like 3% or 4%. The last 0.2% of your withdrawals is not going to be the make or break for your portfolio for the next 30 years. It doesn't actually impact that much. If you were spending 10% or 20% of your portfolio, yes. But when most clients end out spending 3%, 4%, or 5% of their portfolio, because some of the spending is Social Security and other things that aren't fluctuating, the actual impact of continuing your spending is way less than most people realize.

Carl: Totally. I agree. Yeah, small tweaks made over a long period of time make a massive impact. The same story we were preaching about saving 50 bucks a month when they were 18.

How What-If Scenarios Can Help Clients Visualize Proposed Changes To Their Plans [00:25:42]

Michael: Now, I do have to ask, as someone that I know has kind of professed not being a big fan of the plan, right, the printed plan in the first place, how do you facilitate this conversation? Now do you print a plan and start showing them scenarios? Would you put the planning software up on a screen and do it interactively?

Do you prefer to just do this as a conversation, "Let's just talk about the things we can't control and the things we can control" and try to just get them mentally there? How do you try to facilitate this conversation when you said, "Come on in and we're going to co-pilot this together," and they come in and now you've got to deal with it?

Carl: Yeah. You find the best tool you can to play what-if scenarios. And if you can do that interactively, amazing, right? And those tools are now becoming more and more available and better and better. Like you and I talked about this in the past, there's still some work to be done there, but there's tools to do. Yeah. So if you can do that live, like, "Hey, look at what happens when we make this adjustment," right, and you can see that happening, that's amazing. It's amazing.

We've got to clear something up. I think you're still using the same tools. You're just communicating it a little different. Even this conversation is different than what most...remember, the framework you went into, it's like we had this plan, and what you're changing is like, no, I'm a guide. Let's jump in the car. Let's go, right? And I think if you've got tools to do that, yeah, the more interactive the better, I think. Don't you think?

Michael: Yeah, to me, this is where doing planning software more interactively and collaboratively shines. Whether you're in like MoneyGuidePro's Play Zone or eMoney's Decision Center, when you can put it up on the screen like, "Look, here's where you were, we're going to grab the little portfolio value slider and drag it down a bit because we got hit. Okay, let's see what happens to the plan. Now let's start what-iffing.

Okay, you trim a couple percent off your spending for going forward. Let's look at what that does. Oh, you want to do a more drastic cut but temporarily? Okay, let's see what that does. Oh, it didn't even help as much. You want to change your asset allocation? Let's see what that does to it." Right? We can start understanding and seeing real-time like what are the levers? Which levers actually impact the most?

Because we're often not very good intuitively at figuring out which levers are actually powerful and which are not so powerful. And it just, to me, very directly facilitates the conversation, okay, we can see now which levers lead to improvement, which ones lead to less improvement. Okay, of the ones that really drive change that you can control, which one do you want to grab and pull right now? And see exactly on the spot what happens.

Carl: Yeah, so good. And because we kind of pointed at it a couple times like pre-commitment…

Financial Planning As An Ongoing, Dynamic Process With Designated Triggers To Justify Revisiting The Plan [00:28:44]

Michael: Yeah. How do you wrap up this meeting? As we kind of wrap up. How do you wrap up this meeting when you've gone through? You've broken the moderately bad news, "Good news, there are some things you can control and you don't have to completely destroy your lifestyle. Bad news, we do have to make some changes. We've modeled them in the planning software. You're going to make this asset allocation change and this spending cut." So we're now kind of wrapping up the meeting. So how do you close? How do you finish this meeting?

Carl: I think we just emphasize that this is an ongoing dynamic situation, right? Planning is ongoing and dynamic. And we write out a prescription. I call it a one-page financial plan, you can call it an executive summary. "Here's the things we decided today, did I get this right? We're going to do this and this and this. Here's the changes we can control. We both looked at the impact that had. All three of us or four of us, whatever, looked at the impact that that would have. Here's where we have agreed. So here's the plan going forward."

And then I also love to identify what the triggers would be that would facilitate revisiting it. Because remember, we all loop on these things, right? So if we can already say something like...it may just be a time, like, "Let's revisit this in 30 days. Let's revisit this in three months." It may be a market situation. Your client may have some business volatility that they're...like, "Hey, if this changes, call me, right, we'll have you back in. We'll do..."

So I love identifying what would be the triggers for revisiting this because that gives them permission to set it aside unless one of those things happen. And when they start looping on it, they can pull that executive summary out you wrote and go, "Oh, yeah, I don't have to think about that. We've already decided." That's such a gift. If you can give them the ability to go, "I don't need to think about that right now. I've already decided." Because they're going to revisit this 100,000 times and their neighbors are like, "Ah," right?

Michael: Yep. Yeah, I love the triggers conversation of when does it matter? To me, I think this is part of why we tend to get so many phone calls from clients, and particularly the nervous ones, because we get caught in this trap. "Carl, the market is down a lot. Are we okay?" "Yeah, yeah, we're okay." "Carl, the market is down more, are we okay now?" "Yeah, yeah, we're okay. Stay the course." "Carl, the market is down more. Are we okay now?" "Yeah, yeah, we're okay." "Carl, the market is down more, are we okay now?" "Oh no, it's too far, you're screwed. We've got to make drastic changes." Right?

So at some point, if they keep calling, you're going to say, "Oh no, we're past the stay the course stage now, you're going to have to make changes and are probably drastic." But they don't know where that line is, right? We're not good at doing compounding retirement income sustainability math in our head. So when they don't know where the threshold is, they just keep calling.

It's like pulling the lottery, pulling the slot machine arm. They just keep pulling the arm until they find out it comes up with something that they've got to do. So when you give them a trigger like, "Look, as long as your spending stays in the 4% to 5% range, you're fine. You're spending $80,000 a year. So as long as your portfolio is above $1.6 million, we're okay. So right now you're still at $1.8 million, so if it continues to bounce around and you're still above $1.6 million, you don't need to worry. You don't need to make any adjustments. If you go below $1.6 million, here are the spending changes we can make. They're fairly modest. You're going to trim a vacation back and you're going to trim your budget by 3%. So if you hit $1.6 million, that's the change you're going to make. It's not disastrous."

And so once that gets communicated, I find the calls also slow way down. People who are just nervous it's going to zero still need to be comforted. Like, "No, the economic system is not imploding upon itself. We will be okay." But you get out of this trap of they keep calling because they know eventually you're going to tell them it's bad news.

And if they have no idea where the trigger is, they just keep calling to find out if now is the time having no idea whether they're even actually close or not. If you just give them the trigger points, "Here's when something will have to change and here's what the likely change would be, parentheses, it's not even actually as bad as you think, but it will be a change," the stress levels go down a lot, right? "I can't tell you with certainty if it's going to happen, but I can tell you with certainty when you're going to need to make a change and what change it will take."

Carl: Yeah. And it's really funny, this isn't some like made-up process that you and I have stumbled upon, right? Like, you may do that intuitively, I may do that intuitively, but there's research around how to make decisions in complex and uncertain environments. And that research essentially says we solve for the next local optimum and then we reset. And the reason we reset is because by solving, taking a step, new information will become available.

So we should be communicating it that way. Like, "Look, here's the information we have now. Based on that, we're going to take these steps. Here's the new information that could become available that would warrant a change. And we're calling that a trigger." And we're not communicating like, "By the way, the plan is set in stone." Here we're using language around, "If these things happen, we're going to get back together and figure it out." Right? So yeah, it's beautiful. That's really, really good work. Hey, man.

Michael: Appreciate the discussion, Carl. I hope this is food for thought for everyone as we're going through these conversations now. As you said at the beginning, as we get past the, "Is it all going to zero?" Like, "No, we'll get through this." And we get into the, "Okay, I get it now. My portfolio took a hit. What do we do now? What comes next?" And we start having these updated plan projections or conversations that, "This is what we're focusing on."

So try not to defend, just empathize and move them as quickly as you can to, "I'm the guide. We'll figure this out together. Let's get in there and start changing the things we can control and figure out how we get back on track."

Carl: Amen, man. Thanks, Michael.

Michael: Thank you, Carl.