How advisers can rebuild client portfolios

The dramatic stock market losses triggered by the COVID-19 pandemic, and the gut-wrenching volatility ever since, demonstrates the value of long-term financial planning. Diversified portfolios are designed to weather market gyrations; the key for financial advisers is to convince their clients to stick with the plan.

“The most grievous sin an investor can commit is to sell at the bottom,” Kara Murphy, chief investment officer of Goldman Sachs Personal Financial Management said Tuesday during the InvestmentNews Navigating 2020 webinar. “The next grievous sin is not to do anything.”

The most distinctive component of the coronavirus crash has been the rapidity of market movements, with a peak to trough decline of 33% occurring over just five weeks in the first quarter of 2020, compared with a 50% drop in market value during the financial crisis of 2007-2009 that dragged over 16 months.

Such severe market corrections cause portfolio distortions, and it's crucial for advisers to rebalance asset allocations, whether they base it on target thresholds or timeframes such as quarterly, semi-annually or yearly, Murphy said.

Patrick Nolan, director of BlackRock’s Portfolio Solutions Group, agreed. “Rebalancing always offers value in terms of keeping clients connected to their long-term plans and horizon goals,” he said. “Rebalancing also gives an opportunity for tax-loss harvesting which is a critical value-add that advisers can offer.”

To illustrate his point, Nolan said that without rebalancing, it would have taken a blended portfolio of global stocks and bonds until 2017 to regain its 60% equity allocation, eight years after hitting the previous market low in March 2009.

Both Murphy and Nolan concede that the country has likely already entered a recession and the ultimate economic rebound will look less the traditional V or U economic recovery and more like a gradual Nike swoosh. The unprecedented response by both the Federal Reserve Board to keep credit flowing to Wall Street and Main Street and the federal government’s direct stimulus payments to small businesses and individuals has been critical to reassure investors. The big unknown is how and when the public health crisis will be resolved.

Nolan said advisers should take the opportunity to reach out to clients and refocus their attention from market declines to their long-term horizon goals. “Remind them their financial plan was not built on the assumption that the market goes straight up,” he said. “It accounts for downdrafts.”

He also recommended that advisers divide their clients based on the type of investors they are and craft an appropriate narrative for each group. For example, a retiree may be absorbing information about the current economic situation differently than a small-business owner or someone who just lost a job.

Mark Balasa, co-founder and chief investment officer of the Balasa Dinverno Foltz, a financial planning and accounting firm, said his team has been proactively reaching out to clients through phone calls, videos and Zoom meetings.

“Our 1,200 clients represent a cross section of humanity,” Balasa said.

“Some are angry, some are scared, some are upset, and some are taking it as a buying opportunity — and that could describe the same client over the course of several weeks,” he said. “The steady drumbeat of negative news on television and the internet that people are consuming in isolation because they are not socializing feeds on itself,” he said

“Volatility has just revved up the emotions of everyone,” said Mark Peterson, a behavioral finance expert and director of investment strategy and education at BlackRock.

“There is no better way to ruin an investment plan than to do the wrong things at the wrong time,” he said. “Advisers are the checks and balances for their clients.”