How Advisors Can Prepare For Bear Markets

Sports pundits claim that the better defense typically wins football games, so how have advisors prepared for the next downturn?

The ups and downs only served to reinforce the fact that nearly three-quarters of investors are concerned about a market correction, according to a 2017 survey by Global Atlantic and market research firm Ebiquity.

With volatility comes client anxiety, and with anxiety comes discussion around loss prevention and steady income, said Paula Nelson, president, Retirement, of Global Atlantic, which recently published the “Downturn Defense” guide.

Fixating on individual products or individual product categories is often misplaced and investors are better off thinking about goals and needs, risk tolerance and time horizons, advisors said.

Address Needs

Portfolios should be structured to meet needs, and when needs are met investors needn’t scramble in a downturn, which is typically the wrong time to address needs.

“For those with immediate cash needs, allocate sufficient amount to cash so as not to have to sell equities at lows,” said Robert Wander with Wander Financial in New York.

Advisors say it’s important to prepare before the bear awakes for real, and that means building a portfolio with different investment pools or “buckets.”

Fill the first bucket with safe and guaranteed money so clients can sleep well at night, said Matt Chancey, in Tampa, Fla.

Pour liquid market-based investments that limit risk into the second bucket and reserve the third for investments that enhance noncorrelated returns and deliver more limited liquidity designed for longer-term goals.

Even bear markets serve a salutary purpose.

They remind advisors of the opportunity to rebalance or reassess allocations, and offer advisors a new opening to talk to clients about whether needs have changed.

Stress Test

The best way to relieve investor stress is to test a portfolio under different conditions – before those very conditions come to pass.

Houston-based advisor Scott A. Bishop prefers the medical analogy of making lifestyle changes before onset of heart attack.

“A doctor gives you a stress test under a controlled environment to see if your heart is healthy and if there are issues, he can adjust your medications or have you adjust your lifestyle,” said Bishop, partner and executive vice president of financial planning for STA Wealth Management.

“Better to know before a heart attack,” he said.

Testing a portfolio for changes in market volatility, interest rates or broad-based downturns, gives advisors time to readjust holdings or investment strategies before stressed clients come through the door.

Better to stress test the portfolio before the market has a chance to test the stress of the individual investor.

“If you need to sell, sell or rebalance now before a market correction,” Bishop said.

Despite the market fluctuations, the S&P 500 index remains basically flat after notching gains of about 20 percent in 2017.

The Polite Pushback

When clients decide to complain, advisors need to be prepared to push back – politely – said advisor Kevin M. Reardon with Shakespeare Wealth Management in Pewaukee, Wis.

Every investor understands that markets rise and fall, but also that anticipating those movements amounts to a fool’s errand.

Reardon recalls having a handful of testy exchanges with clients when the market collapsed in 2001 and 2002.

“When you do get an occasional push back or negative comment, if you’ve done everything right, you are in a position to push back and say it’s not fair,” he said. “If they are aggressive or attacking in their comments, your reply can be equally strong.”

As tension rises between an advisor and a client, Reardon reminds clients of the meetings, the phone calls, the account log-ins during which clients were asked at every turn if they were comfortable with their investment positions.

When a spouse is present to corroborate an advisor’s warnings clients always back down, Reardon said.

Lashing out is often a sign of other things going on in a client’s life such as a divorce or the loss of a loved one, he said.

InsuranceNewsNet Senior Writer Cyril Tuohy has covered the financial services industry for more than 15 years. Cyril may be reached at cyril.tuohy@innfeedback.com.

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