6 moves advisors should be recommending for their clients right now

Though bear markets are never fun, this bear is particularly gut-wrenching because it was caused by the coronavirus catastrophe that continues to drastically change how we live our lives. With many clients fretting and some even more unnerved, here is my take on what advisors should do.

1. Rebalance: I don’t know where the bottom is but I’m 100% certain that stocks are a much better buy today than they were on Feb. 19. Rebalancing during the dot-com and real estate financial bubbles worked out pretty well. Clients should be made aware that buying stocks on sale usually works in the long-run and that they may need to do it several times since we don’t know when the bottom will come.

2. Tax-loss harvest: I tell my clients, “I’m sorry for your loss,” but let’s make the best of it. By selling losses, the client can build up a tax-loss carryforward for use in future years, not to mention the $3,000 that couples can recognize each year. Bad times don’t last forever and markets will move up again. Rebalancing in good times means that you’ll likely tell the client we are selling stocks and recognizing gains. That tax-loss carryforward you build now will be very valuable when you have to sell stocks at gains later on. Since I’m an indexer, I can tell clients to sell one total stock index fund and simultaneously buy another brand of a total stock index fund. If stocks haven’t recovered in the 31-day waiting period to avoid a wash sale, they can then go back into that original fund.

3. Get rid of the dogs: Dogs in the portfolio, of course. Quite often, I tell a client that I don’t like a fund because it’s a bit expensive and/or passing through some capital gains. And, by the way, those funds may pass though gains even in a bear market like this, potentially sharpening investment pain. In addition, individual stocks provide uncompensated risk. But if the gains evaporate or become smaller, minimal taxes would need to be paid. Even if there are still gains in these dogs, the tax-loss harvesting previously mentioned may provide losses to offset these gains.

4. Reframe what the stock market is: I advise people not to think of their equity investments as buying stocks. Vanguard founder Jack Bogle famously said, “Investing is about enjoying the returns earned by businesses. And the stock market is nothing but a giant distraction in that quest to acquire returns that business earns.” I ask clients questions like what kind of smartphone do you have? Do you use Amazon? Where do you get gasoline? I assure clients that capitalism will almost certainly survive.

5. Lead by example: No one likes losing money, but it turns out it hurts a bit less if other people also lose. So I tell my clients that I’ve had to buy more stock index funds twice so far in the past few weeks. I say, “If capitalism fails, I’m going down with you.” It has a calming effect. But I also try to empathize with clients and let them know how hard it is. I sometimes have them watch this CBS video filmed in March 2009, two trading days before the market bottomed. I let them know that, even though I was saying stocks are on sale and people should be buying, my inner voice was saying, “Please, please, please let me be right.”

6. Be prepared to be fired: In the last bubble, advisors as a whole behaved badly. Advisors on the TD Ameritrade platform had only 26% of client assets in cash and fixed income on Oct. 9, 2007, the day the market peaked. By the time the market bottomed on March 9, 2009, they had virtually doubled the allocation to 51%. Advisors timed markets poorly and the most often excuse I heard was “the client demanded I reduce stocks.” We are paid in part to provide discipline and not to enable client fear and greed. If we are fired – so be it.

It's so easy to be a good investor in good times and the 11-year bull market brought us a false sense of comfort. It’s times like these where a good advisor can help clients through truly difficult times.