Recession-Proofing Your Clients' Portfolios

According to the panelists, to navigate this environment, investors must be very cognizant of their time horizon and plan accordingly. There are obvious rules of thumb to follow, they noted. For example, if a person is planning to retire within the next five years, any non-discretionary wealth that is likely to be needed in the short term shouldn’t be heavily invested in stocks.

But if investors have more time, the panel agreed, they can take heart and stay invested. Stocks may be down, but that means they are cheaper. If past recession-bear market combos are any guide, it will take anywhere from two to five years for the stock market to recover.

As Blanchett pointed out, research clearly suggests that investors, especially older investors, can reduce the odds of making ill-timed trades by effectively hiring someone else to manage their investment portfolio for them. This probably is going to mean selecting a target-date fund or a retirement managed accounts program inside a 401(k) plan, while outside the defined contribution space, this is typically going to mean hiring an advisor.

Strategic Planning Starts Early

Brown and Kurz suggested the current environment has raised the profile of alternative investment opportunities, as traditional 60/40 portfolios comprised of publicly traded stocks and bonds have failed to hold up to expectations.

However, as the pair warned, there is a vast range of investment products that are both rightly and wrongly described as alternative investments available on the marketplace today. Thus, advisors can deliver a lot of value to concerned clients by helping them to filter through and navigate a very dynamic marketplace.

“I’m one of the greatest advocates and the greatest critics of alternatives,” Brown said. “We have seen so much product development, but a lot of it has not been great, frankly. Wealth management advisors looking for opportunities in this environment should be warned: It is really hard to do alternatives outside of the institutional arena and have it work out well.”

In the end, the panel agreed, this moment shows just how critical it is for advisors and their near-retiree clients to confront sequence of returns risk in a meaningful way. This can be accomplished in many ways, for example by strategically utilizing guaranteed income annuities or by embracing what is commonly referred to as a bucket strategy.

Critically, such strategies must be put in place early and be maintained with discipline, even when markets are soaring. Ideally, clients in this moment will have already set aside substantial resources to cover their living expenses without having to sell equity holdings at a dramatic loss. They can spend from the liquid bucket at a moment like this without having to sell mid-term or long-term investments at a significant loss.

The panel said advisors should counsel clients, during the core of their working years, to set aside at least six months of living expenses that can be used in case of an emergency, such as a job loss or health crisis that keeps the person from working. When people begin to approach and actively plan for retirement — assuming they have adequate resources to do so — they should carry up to 36 months of liquid living expenses. Those with less means may have to attempt to work longer or cut expenses.

A sizable cash reserve may feel like a performance drag during times of very strong returns in the markets, but that type of sentiment misses the point. The safety bucket is there to protect the client in case of a rainy day, the panel agreed, and it is practically guaranteed that a given retiree will have to navigate a downturn at some point during their life after work.