Clients worried about a stock market crash? Comfort them with cash

The long-lived bull market will end one day, but withdrawals just make a bear market worse

Oct 20, 2017 @ 4:02 pm

By John Waggoner

How do you reassure clients who are worried the next bear market will hit as soon as they retire? Cash. Lots of cash. And plenty of preparation.

The stock market's rally is now in its eighth year, and the Standard & Poor's 500 stock index has soared 16.28% this year, assuming dividends were reinvested. Large-company growth funds are up an average 22.01%, according to Morningstar, and the average technology fund has soared 31.04%.

All of which brings up unpleasant memories of the past two bear markets – each successively the worst since the Great Depression. A client sitting on a $1 million stock portfolio could well be wondering if she could retire on $600,000 instead. Taking withdrawals would only exacerbate the effects of a bear market.


The first step is a reality check with clients who are sitting on big gains. "We probably bring it up more frequently than the clients bring it up," said Ray Ferrara, CEO of ProVise Management Group, LLC. "We want to make sure they're sensitive to the sequence of returns from the stock market."

Reminding clients of the stock market's short-term tantrums is a priority for advisers at Budros Ruhlin Roe. "We definitely discuss this with every client who is planning to retire, whether or not they bring it up," said CEO Peggy Ruhlin. "Obviously, we cannot control where the market is or where it will go; we only know it will go up and it will go down. You have to be prepared for both."

Ferrara makes sure to review a client's fixed expenses, such as mortgages, as well as the expenses that are for things the client would like to have but aren't necessary. "We match investments that give predictable income with fixed investments, then we look at the variable expenses, and see how to fund those from different sources," Mr. Ferrara said.


The next step: Raise enough cash so that the client could survive a one or two-year bear market without having to sell. "That's going to be the buffer in the event of a significant downturn," Mr. Ferrara said. He noted that the buffer doesn't have to be cash: It could be a reasonably safe, liquid short-term bond fund or similar vehicle.

The cash cushion also gives clients' stock holdings some time to recover, at least partially. "If their equity investments have not recovered sufficiently after two years, we can typically replace cash by selling some bond holdings, giving the stocks additional time to gain value," Ms. Ruhlin said.

It never hurts to show clients exactly how this works in a real-life situation. "We can show them how this did work for our clients who retired right before the 2008-2009 debacle," she said.

While you should warn clients that the bull market will someday end, you should also reassure them. The current bull market is the second-longest in history, Mr. Ferrara said. "It still has a long way to go before it beats the bull market of the 1990s," he said.


What do you think?

View comments

Recommended for you

Featured video


WisdomTree's Maute: Developing elegant tech-enabled solutions

Advisers need unique technology-enabled solutions in order to have more time to expand their practice, according to WisdomTree's Alisa Maute. What can be done today to create a more thriving business of tomorrow.

Latest news & opinion

Broker protocol for recruiting a boon for clients

New research finds advisers whose firms have joined the agreement take better care of customers.

Meet our 2017 Women to Watch

Introducing 20 female financial advisers and industry executives who are distinguished leaders, advancing the business of providing advice through their creativity and hard work.

Raymond James executives call on industry to keep broker protocol

Also ask firms to pay for the administration of the protocol to 'ensure its longevity and relevance.'

Senate committee approves tax plan but full passage not assured

Several Republican senators expressed reservations about the bill, and the GOP cannot afford too many defections.

House passes tax bill, focus turns to Senate

Tax reform legislation expected to have more of a challenge in upper chamber.


Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print