How Advisors Can Be Successful, Even In Bear Markets Financial advisers

Bear markets happen. And while stock and bond market declines seem more like lashes than periods of wealth destruction, your clients still need you to speak directly to them about threats to their retirement goals.

There is no better way for financial advisors to prove that they really put their clients first than by preparing them for the range of possible investment climates. If you can eliminate the element of negative investment surprise, you risk outperforming many of your competition. It will matter when the proverbial dung ends up hitting the fan.

Here’s how advisers can be successful, even in the worst of bear markets.

A bear market is defined by some in the consulting industry as a 20% drop from a high point to a low point.

This is perhaps the least useful definition you can present to your customers. It misses out on what a bear market really is: a combination of lower lows and lower highs in price, or a downtrend that goes from routine and dry to dramatic and emotional.

A 20% drop occurred in a matter of days at the start of 2020 and in about three months at the end of 2018. Both ended too quickly to cause real lasting fear.

Some would call these markets bearish and state that it hasn’t been very long since we’ve had one.

Let them have illusions. The last real bearish market for the S&P 500 was from the fourth quarter of 2007 to the first quarter of 2009. Over 18 months, it included a drop of more than 50% from peak and a shift in investor mindset from “I like stocks” to “I will not invest in certificates of deposit because they are too risky.” This is a bear market.

A common myth is that bear markets are part of a long-term investor, and you just need to stay patient and fully invested in your plan throughout these phases of the market cycle.

Tell that to investors who retired in 1999 and were still waiting to break even 10 years later. Repeat this to those who thought they were in good shape in the early 1970s, only to see stocks and bonds crumble and not recover for many years.

Let’s face it: the advice to “just hang on” has a lot to do with the goals of large financial companies to keep their assets from leaking out when markets crash.

Dealing with bear markets is not for everyone. But for advisors who want to help their clients pursue their goals with less drama and more confidence, preparing for bear markets is as important as any aspect of your practice.

Some investors think stocks have bear markets and bonds don’t.

Advisors who worked in the industry during the financial crisis or the dot-com bubble know what a bearish stock market looks like. These were periods of several months when the S&P 500 was at about half of its all-time high. Sure, the market came back and hit new highs, but it took years to happen.

Bonds haven’t seen a sustained bear market for over 40 years, which is exactly why this market is more conducive to a bear.

Rates are so low and the spreads of non-Treasury bonds over Treasuries are so tight that bonds are more likely to produce low positive or sustained negative returns over the next decade. This will shock investors.

Most of your clients know stocks are volatile. But they don’t realize how volatile bonds, which are the supposedly “safe” and complementary coin to their portfolio, can be. As with stocks, a bearish bond market has the potential to destroy wealth, both before and after inflation is factored in.

You can’t start planning to endure a bear market when it’s obvious to everyone that a bear market cycle is underway. It’s about proactively considering something that many advisers don’t – a bear market cycle can happen at any time.

So how do you prepare for the bear, even though you might not see one soon?

It starts with negotiating the traditional “quarterly asset allocation rebalancing” approach for a more flexible approach to asset allocation.

One way to manage your clients’ life savings and retirement dreams is to develop a process that recognizes what advisors already know: Almost all long-term growth investors want to be a capital preservation investor as soon as they start. ‘they see the threat of heavy wallet losses. So why not respond to them proactively? Everything else depends on the potential for recovery of the bear market in question.

Specifically, it’s about having multiple scenarios of how your client would be invested, based on your assessment of the risk of major loss.

The toolkit for this involves a few things. It includes a methodology for measuring the risk of a major disaster. (Hint: The higher the market valuation and the more meme stocks dominate the headlines, the higher the risk of a major loss to follow.) He developed several scenarios (up to seven or more) and a predetermined plan for the distribution of your customers. stocks, bonds, hedging methods and other assets will vary. Finally, it combines the risk assessment system with the movements to be made as the major risks rise and fall over time. This is an active strategy, but it doesn’t have to be overactive. It is not a strategy of setting up and forgetting.

Your customers don’t want to risk losing a large chunk of their fortune. And when the next bear market hits, their confidence in the markets to recover and in you being their financial shepherd could be damaged. You can choose to be reactive or proactive.

Will this increase long-term returns for clients? Perhaps. But if executed correctly and consistently, including with full communication, education, and transparency to the customer, in words they can understand (no jargon), it could save your best customers from become your most difficult customers.

This commentary is provided for informational and educational purposes only. The information expressed here reflects our judgment as of the date of writing and is subject to change at any time without notice. They are not intended to be investment advice or a recommended course of action in any given situation. Rob Isbitts is an Investment Advisor representing Dynamic Wealth Advisor dba Sungarden Investment Management. All advisory services are offered by Dynamic Wealth Advisors.