Give market downturns credit for this much: They provide a reminder to clients that diversification is often better than
That's how Andrew Briggs, the director of portfolio and wealth management at Plaza Advisory Group in St. Louis, sees the sell-off in stocks in recent days. Briggs, whose firm is an affiliate of the hybrid RIA Steward Partners, said one way to relieve the pain clients may feel at seeing losses in the equity portion of their portfolios is to show them how investments in other assets
Before the markets started on their downward trajectory last week, Briggs said, clients would frequently say during their regular meetings with advisors that they want to be more heavily invested in hot growth stocks like the
"It's really times like today that serve as a good reminder why we are not chasing the hottest and latest, greatest things, like the Magnificent Seven," Briggs said. "This is why it's important to have diversification outside of equities or even within equities, and not being entirely growth focused. To some degree, this is a good psychological reminder that it's not good to be isolated in the so-called hot sectors."
No need to panic
Briggs and other advisors were girding themselves this week for the possibility that they would be fielding calls about what the market downturn might mean for clients' investment portfolios. Friday's sell-off — sparked in part by an unexpectedly low jobs report — continued into Monday,
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Like many advisors, Briggs said it's too early to tell if the volatility signals the end of the bull market that recently drove the S&P 500 to record highs. The market tends to fluctuate by about 10% every year, he noted. Despite the recent sell-off, the S&P 500 was still up by nearly 9% for the year at the end of trading on Monday.
"From that aspect, we are still above trend here from a market standpoint," Briggs said. "So it's very premature to panic."
Other advisors were at pains on social media to remind clients that market corrections happen almost every year. Jack Heintzelman, a financial planner at BostonWealth Strategies,
Alleson Tate, the founder of Avere Wealth Management, a registered investment advisory firm in Atlanta,
The Fed's next move?
One big lingering question is whether recession fears arising from the market sell-off will prompt the Federal Reserve to reduce interest rates, and by how much. Joseph Kalish and Veneta Dimitrova, a pair of analysts at Ned Davis Research, noted in a report on Monday that the yields on longer-bonds show a broad expectation that the Fed's main overnight lending rate for banks would fall to between 3% and 3.25%. The rate now ranges from 5.25% to 5.5%.
"Next year's pricing makes sense if the U.S. economy falls into recession and/or inflation tumbles below the Fed's 2% target," according to the report.
Van Dusen said she runs tests to gauge how various investing strategies will perform hypothetically in scenarios involving rising interest rates, equity sell-offs and widening credit spreads. The goal, she said, is to shield clients from the pain that can be inflicted when things turn bad.
The diversification trade-off
Often, Van Dusen said, the trade-off for diversification is to give up a bit of the upside that can be had by being very aggressive in bull markets. The benefits of such a strategy can be hard to explain to clients who regularly read reports of outsize stock returns in the news, she acknowledged.
Van Dusen agreed the current downturn serves as a useful reminder, albeit a temporarily painful one, of the benefits of diversification.
"No one expects a correction or a sell-off or even a recession," she said. "Basically, no one can call these things. But, as a professional investor, you know it's part of investing."
Van Dusen said she has yet to hear from any clients who are panicking about the market news. Expressions of anxiety, she said, are more likely to come from friends and family who aren't working with a financial planner.
"I think we've trained and educated clients about the market," she said. "They know that corrections are a normal part of almost every year."
Ways to diversify a portfolio
Ray Baraldi, a senior financial advisor at 2/13 Strategic Partners in Wayne, Pennsylvania — an affiliate of Hightower — likewise said he hasn't heard from any panicky clients. He acknowledged that might change if the sell-off continues. But he said he also likes to think the absence of overblown fears is a reflection of how much time he and his colleagues have spent trying to explain to clients the benefits of diversification.
Like the advisors Briggs works with, Baraldi found himself having to field questions during the bull market from clients wondering why they weren't
Many private credit and private equity funds, he noted, allow investors to sell their shares only at certain set intervals — often once a month or once a quarter. That helps combat the volatility that can come from panic selling.
"They tend not to get caught up in the big trading days like today, which will affect prices," Baraldi said.
For most clients, his recommendation is to say the course and remember the goals they started with when they worked out a financial plan with an advisor. If anyone did want to make changes in response to the recent news, he said, they might consider taking some money out of "growth" stocks like the
"It doesn't pay to be all that speculative now," Baraldi said. "If you do have some speculative exposure, you want to make sure you are not at 25% or 20% of your portfolio."
Van Dusen said sell-offs are also a good time to be on the lookout for bargains. She noted that shares in the chipmaker Nvidia, one of the
The stock, she said, is starting to look like a strong buy prospect.
"But we would buy anything that's a high-quality growth prospect, if the valuation and earnings seem right," Van Dusen said. "So we are starting to look at these things."
