The Advisor’s Approach to Active Management for Headline Events
Donald Trump’s surprise victory in the 2016 U.S. presidential election showcases why advisors need to warn clients against trying to time the markets.
Not only did most political commentators expect him to lose by a substantial margin, a considerable number of market watchers assumed stocks would plummet if he did win. Although those political commentators were proven wrong, markets did swoon for a brief period before climbing upward in embrace of Trump’s economic policies.
The market climb also coincided with U.S. Treasury rates beginning to rise immediately after the election. Ten-year Treasuries rose from 1.88% on Nov. 8 to 2.60% on Dec. 15, 2016, before dropping to 2.45% by the end of the year.
While many advisors frequently stress staying the course with their clients, there are times when a bit of portfolio maneuvering can help. Sometimes disruptive events are marked on the calendar years in advance.
“The presidential election was the kind of situation where advisors using a proactive approach could have protected concerned clients by imposing trade limit orders on losses, options strategies to cover positions in case of a market sell off, or even short-term ETFs with an inverse relationship to the S&P 500,” says Alex Chalekian, CEO of Lake Avenue Financial, an RIA in Pasadena, Calif., that manages over $150 million.
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Chalekian says while he does not indulge in market-timing, there’s a middle ground between doing nothing in the face of a major scheduled headline event and abandoning rational investment strategies. “Advisors who took the knee-jerk approach in hopes of avoiding a crash, by selling off large holdings for clients before the election only to find themselves buying back in at higher levels, shot themselves in the foot.”
Steve Kaplan, head of Portfolio Insights for J.P. Morgan Asset Management, says that the intensity of the news flow on issues such as trade rhetoric and election battles makes it both impossible and unwise for advisors to react to everything.
“While advisors feel they may need to do something, portfolios should have a strategic long-term view based upon their risk profile and goals and make tactical shifts on the margins versus significant changes,” he says.
Advisors who abide a fiduciary responsibility would do well to apply behavioral finance and a “know your client” investment approach when managing clients through disruptive events, according to Kevin Scanlon, director of the Private Client Group at Stephens Inc., a diversified financial services firm based in Little Rock, Ark.
His advisors are more likely to “hedge” the portfolios of clients with a low tolerance for market swings, or a short-term investment horizon and need for cash. This may involve adjusting a client’s portfolio from a mix of 75-80% equities and 20-25% fixed income to a more conservative asset allocation of 60% equities and 40% fixed income.
“For clients with a high risk tolerance, significant resources, or an extended investment timeframe, we may recommend a ‘stay the course’ approach, rather than limiting upside or withdrawing from the market and related investments to protect the portfolio,” Scanlon says. “There are clear benefits to staying in the market as opposed to attempting to time when to invest or pull out.”
Brad Bernstein, a Philadelphia-based financial advisor at UBS, insists on always staying true to an investment strategy instead of trying to position clients for short-term events. Even so, he employs both strategic and tactical components to wealth management. The strategic component reflects a client’s risk tolerance, time horizon and cash flow needs. The tactical component responds to the day-to-day impact of economic, political, financial and tax considerations.
“It is important to have enough cash on hand to not have to touch one’s long-term and lifestyle portfolios during short-term market volatility,” Bernstein says. “However, after a significant move in the markets and at least once a year, we believe in rebalancing our portfolios to take advantage of the opportunities. This forces our clients to buy low and sell high and reduces risk.”
“When headline events loom, think of the years to come instead of the next day. While geopolitical events certainly warrant client discussions, they shouldn’t be the driver of significant changes to how portfolios are allocated.”
- Steve Kaplan, Head of Portfolio Insights for J.P. Morgan Asset Management
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