Asset Allocation Is Your Friend: What to Advise Your Clients to Do Right Now

Asset Allocation Is the Most Important Portfolio Defense

 What will allow your clients to sleep at night is to put in place a defensive asset allocation. This works far better than the advice the titan of finance, J.P. Morgan, gave to a young man who told Morgan he had so much invested in the market he couldn’t sleep at night. What did Mr. Morgan advise? “Sell down to the sleeping level.”

What to advise your clients to do now:

Your clients need to have twelve to eighteen months of expenses in cash. Add 15% to that sum because all of us tend to underestimate our expenses. If your clients do not have this amount, then first sell some of the bonds in their account. Interest rates are effectively zero, so you can sell without a loss.

Stocks Are for the Long Term

I know this is difficult to say to clients in a time like this, but you need to say it and say it often. We know from past bear markets that going into a panic and selling all of our stocks into a falling market isn’t the action to take. As we have told our clients many times, “stocks are for the long term.” Say it again, even if it annoys them.

Here Are the Statistics You Need to Know and Communicate to Your Clients NOW

These figures are from charts prepared by Crandall, Pierce & Company, a highly regarded investment research firm.[1]

Rolling Three-year Returns S&P 500 at Following Asset Allocation

With an asset allocation of 30% stocks, 60%  bonds, and 10 % cash, there has never been a rolling three-year period between 1950 and March 2020 when you would have experienced a negative return. 

Rolling Five-year Returns S&P 500 at Following Asset Allocation         

With an asset allocation of 60 % stocks, 30% bonds, and 10% cash, there has never been a rolling five-year period between 1950 and March 2020 when you would have experienced a negative return.

Rolling Ten-year Returns S&P 500 at Following Asset Allocation

With an asset allocation of 60 % stocks, 30% bonds, and 10% cash, there has never been a rolling ten-year period between 1950 and March 2020 when you would have experienced a negative return.

Ten Years Is Long Term to Your Clients

Most clients can’t think past ten years. Any time beyond that seems to be in a distant and unimaginable future, especially for your older High-Net-Worth/Ultra-High-Net-Worth (HNW/UHNW) clients.  So, remember regardless of your client’s age, most think ten years is “long-term.” I wouldn’t try to change their minds.

Repeating “Stocks Are for the Long Term” Isn’t Easy Now

I know going into your spiel that stocks are for the long term is very difficult now. Believe me, I’ve been through some brutal bear markets in my career and during my years at Cannon. Adding to the pain of the bear market is, seemingly in the blink of an eye, your clients have given up all the gains they accrued in a fifteen-year bull market.

Clients Remember Losses More Than Gains

This is one of the infuriating parts of our business. Even if you had your clients selling into the market as it went up and taking a fair amount of money off the table, it’s human nature to forget the gains and remember the losses. Remind them, in writing if you can, about the money they have made and that their losses are unrealized.

Resource:

[1] http://www.crandallpierce.com/

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Contributing Writer: Subject Matter Expert Charles McCain