Taking steps to prepare for a potential down market

The most important lesson I’ve learned through multiple market downturns — which also rings true for other areas of business — is to be overly proactive. This doesn’t mean just reaching out to clients when the market starts to take a turn for the worse but having those conversations about recessions well in advance of a downturn to best prepare clients for that eventuality. This approach is an important consideration for nearly any role in any industry, not just the investment world.

Preparing a client far in advance of a recession and discussing should be done when one hits is one of the many important conversations I can have. Doing so helps clients mentally prepare for what is to come, whenever it may happen. Having this discussion will, in turn, make the adviser’s job easier and, most important, may help prevent a client from making a rash decision that could negatively impact their financial situation for the rest of their lives.

Taking a step back to review the current market environment, it’s not surprising that the equity and bond markets have had a difficult year and we are in our second bear market since the start of 2020. Through this time, the core principles of asset allocation for individuals and public pension funds have continued to prevail. An appropriate asset allocation, one that meets your willingness and ability to take on risk, is still one of the best tools to help you achieve financial independence and maintain it throughout your lifetime.

A lot has changed over the 33 months since the start of the pandemic, but many investing values have not. I never thought there would be a time where we are witnessing meaningful inflation, rising interest rates, labor shortages and a war between Russia and Ukraine, all while nearly three years into a global pandemic. Just five years ago, this would have seemed like incomprehensible fallout from the 1995 movie “Outbreak,”, but now it’s just life as usual. We have come so far since the start of the pandemic that we have already forgotten that we all became well versed in epidemiology and mRNA vaccines, or that “Tiger King” was one of the most interesting things in our lives.

This may feel like the most unique investment environment we will see in our lifetimes, but as history indicates, it is likely not. During times of market volatility, I have experienced conversations with clients who are panicking, angry or worried they are at risk of losing their life’s savings. One of the primary mistakes individuals make is abandoning their well-designed asset allocation in times of uncertainty. This is not always the client’s fault and can be caused by an investment adviser being reactionary rather than proactive.

The most difficult thing an investor will ever do is predict a market top, and it’s even more difficult to predict a market bottom. This requires making two correct guesses, which I have never seen done consistently, especially when emotions are running high. More commonly, panic selling occurs at or near the market bottom, the worst time to exit.

Instead, being proactive with clients to help them maintain an asset allocation mix of cash, fixed income, equities and alternative investments, combined with rebalancing, is a time-tested strategy that has been effective during previous recessions and now during a pandemic.

For the investment industry, our known unknown is that the markets do not always go up, and it’s difficult to anticipate a drop. Over the last 50 years, the market has produced double-digit annualized returns, but over half of the time, the market is either declining or recovering to its previous high. Finding your business’s known unknowns, and addressing them proactively whenever possible, is an important step in helping your business and your clients better prepare for the future. ●

Mike Rayfield, CFA, CFP® is Vice President, Investment Advisor at Ancora

Mike Rayfield

Vice President, Investment Advisor


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