September 26, 2018 / 10:01 AM / 2 years ago

COLUMN-Preparing for a bear market with your adviser

 (The opinions expressed here are those of the author, a
columnist for Reuters.)
    By Gail MarksJarvis
    CHICAGO, Sept 26 (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
    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.
    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.
    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 (
    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. 

 (Editing by Lauren Young and Steve Orlofsky)
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