Virus Hits Investments; Advisers Preach Patience

YOUNGSTOWN, Ohio — After Wall Street reached all-time peaks in February, the coronavirus brought the country’s longest-running bull market to a screeching halt. Between Feb. 12 and March 23, the Dow Jones fell 37%. The S&P 500 plummeted 34% in roughly the same period. In six weeks, the markets lost almost as much as they did during the entire Great Recession. 

But wealth management advisers, through all of the crazy headlines this year, have advocated largely for one strategy: staying the course. 

Even with market downturns and outright crashes, in the long run, the market trends upward. A one-week dropoff like the one brought by the coronavirus is eventually erased and the market continues to climb. By the end of June, both the Dow Jones and S&P 500 had recovered those initial losses.

“If you’re talking about the actual cause of the market drop – the pandemic – then it is something new and unprecedented. As far as the market crash, bear market or whatever you want to call it, this has all happened before,” says Patrick Russo, wealth adviser at Daprile Financial LLC, Canfield. “I’ve got a chart on my wall showing the market all the way back to 1925. It shows the stock market through every dip, pullback and crash. It always shows the same thing: bear markets are followed by bull markets.”

While advisers did have to deal with clients who wanted to pull out of the market, the conversations around what to do were straightforward, they say. Unlike the Great Recession, which was the confluence of several factors – ranging from the housing bubble to government policies to personal debt to subprime lending – the coronavirus crash was easy to explain. 

Large swaths of the economy, both in the United States and abroad, had to shut down to slow the spread of COVID-19, which meant businesses weren’t making money, which led to lower stock prices. While there were some signs of a potential economic slowdown before the crashes in February and March, it was the virus that brought a recession. 

“It helps, in a weird way, to see that one thing causes another,” says Kevin Chiu, vice president of Elsass Financial Group, Canfield. “I think people didn’t make, in our estimation, as many emotion- or fear-based decisions because there was a correlation.”

With that understanding and a diversified portfolio of stocks, equities and bonds, wealth advisers were able to mitigate some of the impact. 

“Psychologically, it hurt badly. But if you think about diversification and a balanced portfolio – maybe 60% in stocks or equities – a 35% drop in the market is only affecting 60% of [your portfolio],” says Farmers Trust Co.’s chief wealth management officer, Mark Wenick. “The other piece, bonds, are holding fairly steady. Diversification like that provides cushion from those big shocks.”

However, with the Federal Reserve dropping its benchmark interest rates several times last year and to nearly zero in the immediate wake of the coronavirus market crash, bonds have lower yields, Chiu says, so they have been providing less of a cushion.

At Martin Financial Services, President Jim Martin says he’s keeping an eye on sectors that were particularly hard hit by the pandemic and have yet to recover as possibilities for long-term investment. 

“By rebalancing some portfolios, we were able to take some money off the table after a good run and redistribute it back in through markets that underperformed by buying lower,” says Martin, a Raymond James independent financial adviser. “Anything in transportation, energy, the financials have had a hard time until lately. Anyone with a timeframe can buy airlines now with a basket-type [exchange-traded fund] and get the whole sector.”

Throughout the pandemic and the market crash it caused, among the main jobs of advisers was to keep clients’ emotional reactions in check. It can be terrifying to watch the market fall by a third over the course of a week and lose more than it did during the entire Great Recession. 

“The main concern, during any time the markets are moving down, is the fear and uncertainty over when the bottom is going to hit,” Russo says. “They’re worried about their ability to retire, which is a real concern. They’re fearful that their goals may be derailed.”

One of his biggest concerns was clients trying to time the market, pulling their investments out as they started to fall and jumping back in as they started to rise. The problem with that strategy, Russo says, is that it requires two correct guesses on the timing.

“History has shown us that that’s not the right thing to do because the markets always recover,” he says.

The impact of the virus on investments has also led to conversations about risk, Chiu says, which can help clients and advisers stay on the same page, even if they’re already in regular contact. 

“When markets rip along good, everybody’s aggressive. They want to join in on easy money. When markets get erratic, they question what they’re willing to put up with,” he says. “We’ve seen people, once their account value rebounded, reallocate differently and decide their appetite isn’t what they thought it was. Others have thought, ‘I can deal with this.’ ”

To move those conversations along, Martin uses a software platform called Riskalyze, which allows advisers to ask clients a series of questions about how they’d react in certain situations. 

With that information, the software generates a score on a scale of zero to 100, allowing the adviser to match investments with the risks clients are willing to take.

“There are industry stereotypes. If you’re in your 20s, you should be aggressive. If you’re 62 and plan on retiring at 65, you should be ultra-conservative. To me, that’s wrong,” he says. “Everyone should have their risk number instead of being lumped into broad categories. … Whether you’re 27 or 72, how you feel about the risk of your own portfolio is what’s most important.”

For those who needed to draw from their investments during the pandemic, the risks of being shortchanged by the crash certainly exist, but could be mitigated with planning before the virus arrived.

“Hopefully what you’ve been doing, as you’re getting closer to a retirement date, is hedging your portfolio to a more stable investment like fixed income,” Farmers’ Wenick says. “As you’re building toward retirement, you can invest more aggressively. But as you get closer to the big day, whether it’s education or retirement or a wedding, you’re hopefully allocating money toward cash or to a more stable investment.”

Copyright 2024 The Business Journal, Youngstown, Ohio.