Anyone can seem like a good financial advisor when markets are doing well. The expectation investors have when investing in capital markets is to make money, so when expectations are easy to meet, the bar tends to be set pretty low. However, it’s when markets are down (like the current bear market caused by COVID-19) that separates great financial advisors from mediocre ones. It’s times like these when people may wonder what their financial advisor is doing during this bear market. I can’t speak for all financial advisors, but I can tell you what the advisors at Financial Strategies Group have been and will continue to be doing in the weeks and months ahead.
This is arguably the most important role of a financial advisor at any time, but especially during a bear market. When markets are volatile and times are uncertain, is your advisor calling, texting, or emailing you to check in? Are they providing you with a written market commentary during volatile market periods? Or are you spending your time trying to contact them and find yourself waiting days for a call back? It’s important to stay the course during market volatility and it is much easier to stay in your seat if your advisor is being proactive in communicating with you and offering perspective on what is going on.
Understanding and Setting Expectations
This happens long before a bear market ever occurs. As I mentioned above, the expectation of investing in the stock market is that you will make money. Short-term there is no guarantee that your investment will be worth more today than it was yesterday, but long-term it is very likely capital markets will continue to grow. As an advisor, it is my job to understand the expectations my clients have with growing their money, and making sure they understand the short-term risk associated with long-term expectations. At FSG, we actually employ a software that shows various hypothetical best-case and worst-case market scenarios to help quantify how much risk an investor will need to take for the amount of reward they expect out of their investments. This allows us, from a very early point, to assume volatile periods and observe how they could affect your investments.
I recently spoke with a prospective client who said that they were investing in a “60/40 portfolio” with another advisor, meaning that 60% of their money was invested in stocks, and 40% was in bonds. However, when I ran an analysis on their holdings, we found that 85% of their portfolio had been in stocks! So an extra 25% of their money was exposed to market losses that should not have been. Historically, stocks outperform bonds over long periods of time. When left unattended, stocks that outperform bonds will represent a larger percentage of your investments than you originally wanted. Conversely, in times of volatility when bonds are actually outperforming stocks, a higher bond concentration could mean you miss out on the growth and recovery of the markets. Rebalancing prevents that from happening. When an advisor is not monitoring, and frankly actually managing their clients investments, especially during volatile periods, this can come at a huge cost to you the investor. Regular rebalancing of client portfolios is not only the best practice, but can help mute some of market losses to investors who are less comfortable with market risk and keep those with a higher risk tolerance in the market for the recovery.
Tax Loss Harvesting
Tax loss harvesting is a simple concept that is complicated to execute and has a potentially massive, positive impact on a client’s taxes. Tax loss harvesting is when you have a taxable investment (where you are receiving a 1099 each year for dividends and realized capital gains) in which you can sell a holding at a loss and replace it with another position. This way you are realizing capital losses (which offset future gains and can be carried over on your taxes) without ever exiting the market. Bear markets provide a great opportunity for tax loss harvesting.
This is another simple and valuable concept. If you are utilizing a tax deferred retirement account like an IRA, then you have the option of converting those pre-tax dollars to grow tax-free in a Roth with no tax penalty, regardless your age. The amount that you convert does get reported as taxable income in the year that you convert, but when account balances are down then it is a relatively small tax bill at the present time and will make all of the growth you experience during the recovery TAX-FREE.
Encouraging Clients to Invest More
Each situation is different, and unfortunately many people are experiencing a huge financial loss from businesses being shut-down, or not being able to work due to quarantine or social distancing. However, if you are in a position to funnel more money into the markets right now, then you should be doing so while everything is on sale. It is counterintuitive to average investors to enter markets when things are down but you need to understand that markets often bounce back quickly from corrections and this may be your opportunity to ‘buy low’.
Taking care of my clients and putting their best interest first is the cornerstone of my practice as a financial advisor, and it is ingrained into the core values of our business here at Financial Strategies Group. From our staff to our technology, we are built to be effective and efficient for our clients. If you call, you get a person. If you text or email, you get a response. It is business as usual here and we want to thank our clients for their confidence in us and look forward to the recovery that is on the other side of this bear market.
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This commentary on this website reflects the personal opinions, viewpoints and analyses of the Financial Strategies Group, Inc employees providing such comments, and should not be regarded as a description of advisory services provided by Financial Strategies Group, Inc or performance returns of any Financial Strategies Group, Inc Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Financial Strategies Group, Inc manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.
Written by Justin Meyer