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Preparing for a bear market with your adviser

[September 26, 2018] By Gail MarksJarvis

CHICAGO (Reuters) - Douglas Boneparth will never forget the terrified financial planning clients he counseled after Lehman Brothers collapsed 10 years ago.

"There were emotional outbursts; there were some tears; there was anger," he recalls.

Boneparth was 24 and had just moved to New York City from Florida to start a financial planning job when Lehman filed for Chapter 11 bankruptcy and set off a panic in the markets.

His job was to calm the firm’s clients, even though he had never met them previously: “I was at the center of the apocalypse.”

Now, a decade later, “people are always looking around the corner” for the next crisis, Boneparth said.

So Boneparth, like many advisers schooled in the financial disaster, does not ignore the underlying fear. He wades right in, bringing up worst-case scenarios even if clients do not.

It is a new era in financial advice. Although trust has improved since the crash, it is still an issue for half of people with advisers, a recent Cerulli Associates survey shows.

“Now advisers tell clients to anticipate the next down market, and they are willing to admit they can’t predict when things will go bad,” said Scott Smith, director of retail investors for Cerulli Associates.

Here is what you should be talking about with your financial adviser to prepare for the next downturn.

RUN THE NUMBERS

Financial planner Jim Shagawat, of Paramus, New Jersey, shows a client what would happen to $1,250,000 in retirement money in the event of another sharp downturn. If that portfolio money were invested entirely in stocks, it would suffer a $663,000 loss at the worst point of a 53 percent decline - as severe as the 2008-09 financial crisis - leaving just $587,000.

But Shagawat would not steer a client into an all-equities retirement portfolio. He proposes a modestly aggressive mixture of 56 percent stock funds and 44 percent bond funds and cash. The drop would instead be $441,000 if the loss matched the 35 percent decline of a balanced portfolio in the financial crisis.

Horrifying as that loss might be, many people still find it reassuring because it is based on one of the worst periods in stock market history and uses a significant weighting in bonds to mitigate the sting of stock losses.

If investors are still scared, Shagawat uses Riskalyze software to show more conservative stock and bond mixtures. People can try on the combinations like outfits in a store dressing room before deciding.

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Traders work on the floor of the New York Stock Exchange (NYSE) in New York, U.S., September 18, 2018. REUTERS/Brendan McDermid/File Photo

NOT A ONE-TIME TOPIC

During the financial crisis, 57 percent of financial advisers moved clients into more conservative investments, according to Cerulli. If clients and their advisers had given extensive thought to worst-case scenarios before the crash, emergency changes probably would not have been needed.

Of course, people can change emotionally and financially over time. For example, 40-year-olds can take on more risk than people in their 60s starting retirement.

Financial planners should check with clients regularly at all ages to make sure they are still comfortable with their risks, said John Loper, managing director of professional practice for the Certified Financial Planner Board of Standards.

Individuals wanting to benchmark their own investments by comparing them to averages designed for their age could use target date funds for a model. Be aware that some fund companies take substantial risks, while others do not.

To find the average for your retirement date, see the asset class glide path on page 48 of Morningstar's report on the 2018 Target-Date Fund Landscape (https://bit.ly/2OeiMSF).

WHERE IS THE MONEY GOING

The 2008 downturn sent a vivid message about risk to parents paying for college. Some 529 college savings plans designed for 19-year-olds had moderate stock holdings and lost almost 11 percent in 2008, according to Morningstar. Those for children 13 to 18, fell almost 19 percent.

That is why money you need quickly must get special attention. For example, Loper has a son in college and all the college savings are parked in cash so there is no chance of a loss as tuition bills arrive.

Likewise, financial planners typically tell people to keep house downpayments and other savings that may be needed within five years in CDs, money market funds or savings accounts so there is no chance of a loss.

Boston financial planner Chris Chen, even has retirees keep enough money parked in cash to cover living expenses for four years in case a bear market arrives.

(The opinions expressed here are those of the author, a columnist for Reuters.)

(Editing by Lauren Young and Steve Orlofsky)

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