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A Rare Opportunity Your Clients Need to Understand

Over the last number of years, you likely had to tell your clients the importance of being defensive. This is despite markets rallying to new highs month after month, year after year (except for 2018, of course). Why were you doing this? Because markets tend to become overvalued, and there’s always a catalyst, no one is expecting that causes markets to collapse lower, and you need to protect against that with retirement savings. You’re now being inundated with clients complaining about how low their portfolio has fallen, even if it is just a fraction of market declines. Some are probably calling you to ask to go to cash and take no risk. We know that this is the worst thing they can do at this point in the markets, so we need to come back at them with offense where it makes sense and keep them invested. Not only that, but make the case that if they had cash on the sidelines, or were more defensive overall, now is a great time to take advantage. It is a rare opportunity to have a pullback like this in your investing career, and you and your clients need to capitalize.

To illustrate the point of staying and getting invested, Bespoke Investment Group has a couple of great visuals for you and your clients. They looked at the periods where markets fell over 30% from their highs, and what the forward returns were. Unfortunately, short-term statistics are not with you on this argument – after falling 30%, the stock market almost always falls further to a more substantial max decline:

A Rare Opportunity Your Clients Need to Understand
Source: Bespoke Investment Group

However, markets are impossible to time consistently. If you get out, you might miss the best days of the stock market, and your long-term results will suffer. In just looking at the historical market crashes, you could have made arguments several times that either the market would continue to collapse, or that it was starting its rally:

Market Graph

And what of the returns when the market finally does bottom? Here’s where opportunity knocks. The performance during the rebound is astronomical on all time periods. Even if you are wrong now and markets decline 10%, 20% further, you have a lot of margin for error:

S&P 500 Performance

Your clients need to understand that if they sit on the sidelines, they will miss out. I have seen it before, a lot of clients can’t take the stress of losing even 5% or 10%, let alone 15% to 20%. So in times like these, you need to be ahead of the game, and charts and statistics like this will help you guide the conversation to a place it needs to be, to protect your clients from hurting themselves over the long term.

How can StratiFi help?

Our software makes it easy for you to see who is more conservative than they should be, and those are the clients you should be concentrating on bringing up to the proper risk tolerance bands. To be clear, I do not think you should be increasing clients’ equity exposures if their asset mix would no longer be suitable with their risk tolerance and investing objectives. In cases like the below, though, now would be a great time to bring clients into the risk tolerance you both agreed they can take:

Portfolio Risk

You can easily find clients where this is the case on our dashboard. This could be a simple 5-15% increase in allocations to bring your portfolios in line with their risk tolerance. Given that you have this backup, that should put your compliance department at ease as well. This can be a targeted, thoughtful approach to increasing a clients’ portfolio risk without being offside. Your clients will, of course, be worried that markets will get much worse before it gets better. Tell them you are prepared for it, by showing them what the new portfolio would do in a market disaster:

PRISM Analysis for market Crisis Scenarios

Clients want to be reassured in times like these that you are prepared for the worst, that you are keeping an eye on their financial future, and that you know what you are doing. Don’t kid yourself; some are questioning you about your abilities right now. I think that now is not the time to run for the hills and go to cash. In five, ten years, we may look back on this market pullback as one of the most exceptional opportunities of our investment lives, given how sharp the selloff has been – record-breaking sharp. The 30 days the S&P 500 took to drop 30% from a record high is the fastest ever. Faster than the 1929 drop to 30%, and quicker than the 1987 decline to 30%. The question is, are you and your clients now prepared to take advantage of this opportunity? Or will this turn into another shoulda, woulda, coulda.

Markets will become overvalued again sometime in the future, that much is certain. That is an excellent time to turn defensive again. It is during these periods where the fearful loses wealth, and wealth is built by the disciplined. Now is the time to add value for your clients when they need it most.

Akhil Lodha Author
Co-founder & CEO StratiFi Technologies

Building the industry standard for understanding portfolio risk through cutting- edge technology at Stratifi.

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Additional Advisor Resources

Bob Veres features StratiFi in ‘Inside Information’ February 2022 Edition

Bob asks, “Is it really possible that a portfolio risk assessment tool for wealth managers could be as sophisticated as the algorithms that institutional teams are using?”

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