This is Part 3 of Financial Advisor IQ’s five-part special report on how financial advisors can help their clients through periods of volatility.
Any advisor worth their salt knows how to build a long-term plan and stress the benefits of staying on the preordained path. However, some markets and certainly some investor situations require deviating from the norm. For those situations, different options may be available.
Steve Lee, chief investment officer and managing principal at JFS Wealth Advisors, says the main reason to change course would be if a client’s goals change.
“There are some clients who talk a good game about risk tolerance and goals,” he says. “But at the first sign of downside volatility, they then come back and say, ‘I can’t take it. You have to sell these stocks. I can’t stand to see them drop.’”
Lee says situations like that would be a reason to change the strategic asset allocation to manage the volatility. While he prefers not to change horses mid-race, a reassessment of the client's target outcomes could merit the revision.
“Look at what happened in the month of March and the first seven days in April,” he says. “The speed of descent into a bear market was the fastest in history. Now, the markets are well up 20% off of their lows. If you blinked, you missed that. In many cases, by the time you react, you may well have missed the opportunity.”
Lee says liquidity concerns could present another reason to change course and get rid of an investment, particularly if the investment is high risk and the client is worried it could go to zero in value.
“But you don’t want to be in that position, and some thoughtful planning ahead of time can keep you out of it,” he says.
Sophia Bera, founder of Gen Y Planning, says a job loss or loss of income would be a situation that could lead to an investor needing to change course.
“When you experience a job loss, it kind of shocks the whole financial system,” she says. “You no longer have money coming in. There’s a lot of stress around how you’re going to find a job in a downturn when there’s a pandemic going on.”
The first thing to do is examine whether a client who lost their job has enough emergency savings, Bera says.
“Hopefully you have a few months of emergency savings,” she says. “It’s important to apply for unemployment and understand how your state’s unemployment system works.”
Investors can take on credit card debt in an attempt to avoid withdrawing from retirement savings accounts, Bera says. She suggests helping clients find credit cards that are offering 0% balance transfers.
“You should take that opportunity to help mitigate taking on so much debt,” she says. “If you can move that debt to a 0% credit card or open a new one offering 0% for 12 months, that could be helpful.”
Bera says a job loss could lead to a client needing to tap an investment portfolio earlier than planned. The bad news is that client might incur some losses, but the good news is that client won’t be paying capital gains right now, she says.
If a client needs to tap a portfolio ahead of time, there’s a way to do it, according to JFS’ Lee.
“If a portfolio must be accessed for liquidity when you don’t really want to, start with your biggest, most liquid name that hadn’t suffered from a negative impact,” he says. “I would include bonds, not just stocks. Hopefully people have some of them in their portfolio and hopefully they played their role where they provided negative or lower correlation to equities. That’s also a place to go to avoid selling stocks, assuming someone has a balanced portfolio.”
Gen Y Planning’s Bera stresses that tapping into a 401(k) or an individual retirement account, however, is a measure of last resort.
“A good financial planner would build in a lot of contingencies so the last thing you need to do is tap your retirement account,” she says.
Previous: Investor Myths about Volatility