We often hear from clients who want to know how their hard-earned investment gains will withstand market corrections. Chief Investment Officer Jim Lowell and EquityThe amount of money that would be returned to shareholders if a company’s assets were sold off and all its debt repaid. Research Analyst Kate Austin discussed this topic in our recent quarterly webinar*: Tariffs, Trade and Trump. Please enjoy the excerpt below and click here for the full webinar replay to hear more.
* * * * *
Kate Austin: It’s more a matter of when, not if, we get a correction or a recession, and unfortunately, there’s no one-size-fits-all answer. Everyone’s risk toleranceThe amount of loss an investor is willing to absorb in their investment portfolio. and financial plan is different. The most important thing to remember is that if you have a well-balanced portfolio, one with stocksA financial instrument giving the holder a proportion of the ownership and earnings of a company., bondsA financial instrument representing an IOU from the borrower to the lender. Bond issuers promise to pay bond holders a given amount of interest for a pre-determined amount of time until the loan is repaid in full (otherwise known as the maturity date). Bonds can have a fixed or floating interest rate. Fixed-rate bonds pay out a pre-determined amount of interest each year, while floating-rate bonds can pay higher or lower interest each year depending on prevailing market interest rates. and cash, it is made for these types of situations.
That portfolio is allocated to collect some of the upside when markets are doing well and protect on the downside when markets are not doing so well—proportionate to the percentage of bonds that you have. If you’re really concerned, I’d try and talk with your adviser and make sure that your allocation to stocks, bonds and cash is suited to your riskThe probability that an investment will decline in value in the short term, along with the magnitude of that decline. Stocks are often considered riskier than bonds because they have a higher probability of losing money, and they tend to lose more than bonds when they do decline. appetite.
Jim Lowell: When you say look at your allocation, to stocks, bonds and cash, for many of our clients, they’re going to be hoping that we’re doing that for them, and sort of the emotional question is, what’s the trigger? Is it if you’re feeling nervous about some areas? About the potential for a market correction? Is that a great time to reach out to us?
Kate Austin: Definitely.
Jim Lowell: And say, “Am I prepared?” Is that really what you want to ask yourself?
Kate Austin: You’re going to have to just ask yourself too, “How would I feel if my portfolio fell 15%?” If you’re not going to be able to sleep at night, call your adviser or call us, that’s why we’re here, that’s what we’re here for.
Jim Lowell: Absolutely. For the investment side of your portfolio, by which I mean, where you’re looking to grow your wealth over a long-term time period, that’s one oar in the water. The other oar is how are you going to defend and safeguard all of the wealth that you’ve managed to build? And we are, of course, experts at having both oars in those waters.
We always run with buffers in almost all of our portfolios, even our long-term growth-oriented portfolios, because we cannot predict where the market is going to end [up any given] day, let alone a week, a month or a quarter. All we do know is that over time, certainly having some bonds in your portfolio, maybe even some cash, helps smooth out the day-to-day, the weekly, the monthly volatilityA measure of how large the changes in an asset’s price are. The more volatile an asset, the more likely that its price will experience sharp rises and steep drops over time. The more volatile an asset is, the riskier it is to invest in. that can absolutely be unnerving.
And we would suspect, frankly, it will feel a lot more unnerving this go-around for a few reasons. One, we have gone a long time without any sort of sustained market downturn. Ten years into an expansion is a historic moment. And secondly, as soon as we do take a turn for the worse, I think the ghosts of 2008 and 2009, which we have all put in the far closet of our investment houses, are likely going to come out and begin to haunt our clients’ emotional sensitivity to a market downturn. So our job is to be here, to be steadfast, to be calm, cool and collected to make sure that if you have any questions, we address them instantaneously and directly, both in terms of how we have positioned your portfolio but [whether you] may need to reallocate if you’re feeling that you’d rather safeguard more of your assets than grow more of your assets.
*Webinar recorded after the market closed on July 24, 2019.
This material is distributed for informational purposes only. The investment ideas and opinions expressed should not be viewed as recommendations or personal investment advice, or considered an offer to buy or sell specific securities. Data and statistics contained in this report are obtained from what we believe to be reliable sources; however, their accuracy, completeness or reliability cannot be guaranteed.
Our statements and opinions are subject to change without notice and should be considered only as part of a diversified portfolio. You may request a free copy of the firm’s Form ADV Part 2, which describes, among other items, risk factors, strategies, affiliations, services offered and fees charged.
Past performance is not an indication of future returns. The tax information contained herein is general in nature, is provided for informational purposes only, and should not be construed as legal or tax advice. We do not provide legal or tax advice. Always consult an attorney or tax professional regarding your specific legal or tax situation.
Insurance information is general in nature; and is not to be construed as personalized advice. Adviser Investments, LLC is not licensed to sell insurance products.
Companies mentioned in this article are not necessarily held in client portfolios and our references to them should not be seen as a recommendation to buy, sell or hold any of them.