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The Top Questions Investment Advisors Are Getting Asked Right Now

Worth asked RIAs and financial advisors what they’re advising their clients to do right now. Here’s what they had to say.

With the toll COVID-19 has taken on the stock market, it would seem only natural that investors have questions about what they should be doing now. “Many clients are eager to take some form of action, any action,” says Michael Nathanson, JD, LLM, chairman and CEO of The Colony Group. “They understand that their asset allocation and financial plans were structured to anticipate and withstand market dislocations, but they still want—even feel that they need—to do something.”

So, what kinds of questions are investors asking and what actions are they trying to take? Worth asked RIAs and financial advisors what’s the top question they’ve been receiving from clients and how they answer it. Here’s what they had to say.

What Should I Be Doing Right Now?

“Assuming that you have a long-term investment plan already in place, the primary actions that you should be considering are those that fit within the context of that plan,” says Jim Baird, CPA, CFP®, CIMA®, CIO and partner of Plante Moran.Recognizing that many investors may be actively relying on their portfolio to generate cash for living expenses, the first step is to make sure you have an adequate cash reserve of perhaps 6 to 12 months of expenses available to meet those short-term needs. That liquidity should provide some assurance that your near-term cash needs can be met, while allowing your long-term portfolios (most notably equities and other risk assets) time to recover and grow.”

“Secondly, investors should be looking for opportunities to harvest tax losses in the portfolio without fundamentally altering its risk profile or asset allocation. Selling holdings at a loss and reinvesting the proceeds in similar investments (i.e., replacing one large-cap mutual fund with another of a similar style) allows you to stay invested, while booking losses that can be beneficial from a tax-planning perspective.”

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“Third, investors should look for opportunities to rebalance their portfolio by trimming positions that have held up better (such as high-quality bonds) to add to existing holdings in asset or sub-asset classes (such as small-company stocks) that have been harder hit in the recent selloff,” Baird continues. “Doing so in a manner that is governed by a quantified asset allocation strategy encourages discipline in decision making and reinforces the basic investing tenet of ‘buy low, sell high.’”

“Finally, investors should be looking for opportunities to adjust their strategy and asset allocation plan at the margins to take advantage of developing opportunities. That might mean adjusting within one’s equity portfolio to increase one’s target allocation to parts of the equity market that have been harder hit and where future return expectations look more attractive. Similarly, in fixed income, it might mean allocation more to sectors in which yields have increased in the past month, taking on incremental risk, but with the expectation of better returns in the coming years as yields or spreads normalize.”

What’re We Buying?

“The most important part of portfolio management is a good asset allocation strategy. This results in having the portfolio in a proper structure before volatility starts. Once you drop 30 percent in four weeks, you’re in the middle of a storm, and to be selling into the storm is generally never a good idea,” says Tim Flatley, ChFC®, president and founder of Sterling Investment Advisors. “We are very proud that we did a good job with our asset allocation and rebalancing in January and taking some profits off. We had also put a lot of hedge funds into our clients’ accounts. They protect you on the way down, you can sell in the lower markets without as much damage. The funds can be repositioned into cheaper equities.

“The important thing is to manage the emotions of the client and not to let them do too much damage to their portfolios. If you miss the 10 best days over a 20-year timeframe, you’ll lose half of your return So, the key thing is not to be in a position that forces you to sell at the wrong time. We are talking to all of the relationships we have built over the past 40 years on a frequent basis. Helping them be comfortable and taking advantage of opportunities.”

What Can We Do With the Extreme Volatility?

“The speed of the decline of equity market values is something that none of our clients have experienced,” says Anthony Halpin, founding partner and COO of Chicago Partners. “Everyone is a little shell-shocked, and they are turning to us to figure out what is the best way forward.”

“With a diverse client base, there is not a one-size-fits-all solution, and we are spending all of our time walking through possible solutions for our clients,” Halpin says. “For some clients, we are looking at tax loss harvesting and for others, we are looking to process Roth conversions or adding funds to their account that they were planning to invest at some point during the year. For other clients, we are helping show them how we can continue to provide their monthly distributions without harming their ability to participate in a recovery when it happens. The one common thread that we are sharing with all clients is to use the reduced equity prices to rebalance back to long-term targets with some stability and reevaluate risk with a recovery. This allows us to take advantage of the volatility now by buying low and doing a deeper dive into portfolio construction as we get back to higher portfolio values which will allow us to sell high.”

What Sectors of the Markets Are You Rotating To and From?

“We’re rotating to the sectors of technology, health care and consumer staples,” says Brian Holmes, president and CEO of Signature Estate & Investment Advisors. “These are sectors that not only have strong balance sheets but are in strong demand during this current bear market.”

“The sectors we are rotating away from are energy, financials and commercial REITs,” Holmes says. “Energy will suffer from leveraged balance sheets and a lack of demand for the foreseeable future. Financials will be hurt by a prolonged period of next-to-zero interest rates, and commercial REIT’s will suffer simply from lack of demand in retail brick and mortar businesses.”

Opinions expressed here are the authors’ and do not necessarily represent the opinions of SEIA. Securities offered through Royal Alliance Associates, Inc., member FINRA/SIPC. Investment advisory services offered through SEIA, LLC, 2121 Avenue of the Stars, Suite 1600, Los Angeles, CA 90067, (310) 712-2323. Royal Alliance Associates, Inc. is separately owned and other entities and/or marketing names, products or services referenced here are independent of Royal Alliance Associates, Inc. (CA Ins. License # 0657377).

What Is Your Firm Doing in the Current Market With Our Portfolios?

“One thing that we’re doing is tax loss harvesting, which can add significant economic value with very minimal incremental risk.  We take the time to educate our clients on exactly what tax loss harvesting is and we often quantify the specific economic value created through this strategy for each client,” says Justin Charise, CFP® and founding partner at Saugatuck Financial.

“We also explain that our investment committee meets regularly and looks to identify opportunities in the current market.  Our current bias tilts away from purchasing companies that we see as being positioned to benefit from the coronavirus but that might also be overvalued. So, for example, a company like Zoom, could benefit significantly in the current environment, but has already experienced a tremendous run up in its stock price.”

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“We also have a bias tilted away from investing in companies solely because their stock prices are depressed materially versus the broader market.  If these companies have weak fundamentals or are in industries with longer-term uncertainty, like cruise lines, we tend to avoid investing in them.”

“We prefer to take a longer-term view, investing in companies that we feel had very strong fundamentals before the coronavirus and have had their stock prices decline materially more than the broader market, but for reasons that we view as likely being temporary in nature.”

Should I Sell?

“Our clientele are sophisticated and they’ve been through storms before,” says Lyle Himebaugh, managing partner at Granite Group Advisors. “There are some certain areas and certain allocations that we did take some profits on at the beginning of the year, and there are going to be areas that we’re going to overweight but it’ll all be under the same guise of the client’s personal allocation. So, if the allocation calls for to be 50 percent stocks and 50 percent bonds, within that 50 percent stocks, we might allocate out of one sector to another, but we’re still going to be in invested.”

“It’s really hard to catch a falling knife; you usually get cut. We have mentioned in our blogs not to panic. And we all know, this is not going to be a V-shaped recovery, it’s going to be more of a U-shape, which means that it’s going to be more of an extended recovery, nonetheless it will be a recovery. Regardless of the type of recovery, the markets will predict the future, not the past or the current. We’re not going to snap back because this is a different type of induced recession, but we believe the market will be much higher in 2021 from the end of March. It’s a question of what to buy and when.”

“When someone says sell, we’ll default back to the allocation and speak with them to make sure they are financially sound before taking an action, and we have and would reduce allocations on a case-by-case basis. Overall, we’re going to stay focused on looking forward and looking for the best opportunities when we rejigger allocations,” Himebaugh says. “The only reason why an investor should sell at this juncture is if they really need cash to weather the storm.”

When Is This Going to Be Over, and Is There Anything We Should Be Doing in the Market?

“The first step in addressing that question is really just taking a step back, looking at the big picture, reassuring clients [that] we’ve built a portfolio specifically to address their needs and with the foresight that we would experience these types of corrections, and that we will get through this,” says Eric Pritz, senior partner at Signature Estate & Investment Advisors. “And the key to that is building a bucket strategy where you have a portion of your funds in stay-safe, keep-you-rich assets—typically bonds, core real estate, things of that nature. That bucket is designed to provide for the next three to five years for cashflow needs, which we analyze when we meet with clients initially. We prepare that bucket to be there for them in these times of crisis, and so if we can explain to clients ‘Hey, you’ve got safe money that isn’t following the daily swings of the market and you don’t need to tune into that negative news cycle and scare yourself with the constant media bombardment on your smartphone. That safe bucket’s there for you now, and we expect the riskier growth bucket will be back in five years and hopefully sooner.’ That usually allows them to detach from checking their account daily and eases their initial fear and mindset that something drastic and reactive must be done.

Opinions expressed here are the authors’ and do not necessarily represent the opinions of SEIA. Securities offered through Royal Alliance Associates, Inc., member FINRA/SIPC. Investment advisory services offered through SEIA, LLC, 2121 Avenue of the Stars, Suite 1600, Los Angeles, CA 90067, (310) 712-2323. Royal Alliance Associates, Inc. is separately owned and other entities and/or marketing names, products or services referenced here are independent of Royal Alliance Associates, Inc. (CA Ins. License # 0E55966).

I Think I May Lose My Job, What Should I Do?

“In the case of an unexpected job loss, the first thing to consider is whether there are sufficient cash reserves for near-term expenses,” says Dawn Doebler, MBA, CPA, CFP®, CDFA®, principal and senior wealth advisor at The Colony Group.This is why a basic tenet of any good financial plan is to maintain enough cash to cover six to nine months of expenditures. It also points out why these reserves should be held in cash, so that one is not forced to sell securities in a depressed stock market.”

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“If appropriate, a job loss might also call for de-risking the portfolio,” Doebler continues. “That’s why we review the existing asset allocation and confirm it is still appropriate given new circumstances. Related, if clients hold a substantial concentration of company stock and also have cash flow dependent on that company, then it may be time to reduce that overdependence by selling some of the company stock.”

Investing and the Economy

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