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Portfolio Perspectives

Use our interactive timeline to explore how your portfolio decisions would have needed to change through the years. How would your choices have measured up against the current offerings?

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Contagion Risks

Global Financial Crisis | October 2007 - March 2009

The global financial crisis wreaked havoc with the portfolios of many wealth management clients, particularly those with financial advisors who thought they were probably diversified.

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Which portfolio would have been ideal to have during the Global Financial Crisis? Select different portfolio options to find out.

Choose from the portfolio options below

S&P 500 J.P. Morgan 60/40 Benchmark Your Selection

Select a Portfolio

MSCI EAFE NR USD 5.00%

Russell 1000 Value TR USD 5.00%

Russell 1000 Growth TR USD 5.00%

Russell 2500 TR USD 3.00%

MSCI EM NR USD 2.50%

BBgBarc US Agg Bond TR USD 61.25%

BBgBarc US HY 2% Issuer Cap TR USD 10.50%

JPM EMBI Global Diversified TR USD 6.75%

MSCI US REIT NR USD 1.00%

MSCI EAFE NR USD 10.00%

Russell 1000 Value TR USD 9.88%

Russell 1000 Growth TR USD 9.87%

Russell 2500 TR USD 5.25%

MSCI EM NR USD 4.50%

BBgBarc US Agg Bond TR USD 45.25%

BBgBarc US HY 2% Issuer Cap TR USD 8.00%

JPM EMBI Global Diversified TR USD 5.25%

MSCI US REIT NR USD 2.00%

MSCI EAFE NR USD 20.00%

Russell 1000 Value TR USD 19.25%

Russell 1000 Growth TR USD 19.25%

Russell 2500 TR USD 10.50%

MSCI EM NR USD 9.00%

BBgBarc US Agg Bond TR USD 9.50%

BBgBarc US HY 2% Issuer Cap TR USD 4.50%

JPM EMBI Global Diversified TR USD 3.00%

MSCI US REIT NR USD 5.00%

2007 2009

How Advisors Identify and Diversify Away from Hidden Contagion Risks

The global financial crisis wreaked havoc on investors’ portfolios, including those of wealth management clients who thought their financial advisors had them properly diversified. In truth, when the S&P 500 plummeted 54.89% between October 2007 and March 2009, those investors learned the various asset classes across their portfolios were far more correlated than was otherwise thought. As a result, hidden contagion made the clients of seemingly savvy financial advisors far more vulnerable than they expected.

Advisors who successfully weathered the storm say identifying and diversifying away from contagion risks in the future is possible – at least for those who know where to look. Spotting correlations among sectors, asset classes or countries is a good first step. Tracking major outflows and consistent flights to safe haven assets is another useful measure. But the real key is being able to identify potential triggers by making connections between seemingly distinct markets.

“Looking at the 2008 correlation and contagion, the lesson for advisors is to not conflate diversification and risk management,” says Greg Luken, a former financial advisor who runs Luken Investment Analytics, a Nashville, Tenn.-based quantitative outsourced CIO firm serving advisors. “Know the maximum acceptable loss in the portfolio, and in each respective investment in the portfolio, as well as conditions when you will exit the position.”

Know the maximum acceptable loss in the portfolio, and in each respective investment in the portfolio, as well as conditions when you will exit the position.

Greg Luken, founder, Luken Investment Analytics

He warns that waiting until you’re in the midst of a crisis or potential crisis is the wrong time to start. Instead, Luken suggests, advisors should begin with the end in mind. Earlier this year, wary of how rising interest rates are affecting bonds, his firm started proactively de-risking portfolios for advisors by increasing positions in short-term and floating-rate fixed income.

Luken also notes that while no signs of global contagion are imminent, he does point to potential debt restructuring problems in Greece and Italy as having the potential to spark a contagion event in the Eurozone that could one day affect U.S. advisory portfolios.

Bar Graph

Adam Taback, a one-time financial advisor and global head of alternative investments for the Wells Fargo Investment Institute, says although diversification should be achieved through uncorrelated asset classes, he encourages advisors to consider their clients’ liquidity needs when trying to diversify away contagion risks.

“Cash as an asset class — for liquidity, safety and opportunistic purposes — was a lesson many advisors learned during the crash,” he says, recalling how in 2008 cash was one of the only asset classes to avoid losses and that advisors who had already given client portfolios enough exposure to it were able to reallocate at significant bargains.

Cash as an asset class — for liquidity, safety and opportunistic purposes — was a lesson many advisors learned during the crash.

Adam Taback, head of global alternative investments, Wells Fargo Investment Institute

On the other hand, Taback says, advisors discovered that a lack of liquidity from alternatives such as hedge funds benefited certain clients. “By keeping investors from redeeming quickly out of fear, managers could keep the capital and gain returns, since the next calendar year, markets saw a big snap back up in 2009.”

If a new contagion on the magnitude of the 2008 crisis does strike, advisors should think twice about running to treasuries, according to Michael Poppo, a New York-based financial advisor who manages over $1.3 billion at UBS.

During the financial crisis, the MSCI EAFE fell more than 50% before rebounding by more than 70% in the following year. The massive outflow from foreign markets, coupled with the massive inflows into U.S. Treasuries, left the U.S. government benchmark Treasury with an effective yield of 0%.

“Selling out after a historically significant correction is rarely a good idea and, in this analysis, would have resulted in leaving the MSCI EAFE — yielding 5% — to purchase an overvalued, effectively non-yielding investment,” Poppo says.

Headline Events

Pre/Post 2016 Election | July 2016 - December 2016

The United States presidential election of 2016 was the 58th quadrennial American presidential election, held on Tuesday, November 8, 2016. Trump took office as the 45th President on January 20, 2017.

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Test a portfolio

Which portfolio would have been ideal to have during the Pre/Post 2016 Election? Select different portfolio options to find out.

Choose from the portfolio options below

S&P 500 J.P. Morgan 60/40 Benchmark Your Selection

Select a Portfolio

MSCI EAFE NR USD 5.00%

Russell 1000 Value TR USD 5.00%

Russell 1000 Growth TR USD 5.00%

Russell 2500 TR USD 3.00%

MSCI EM NR USD 2.50%

BBgBarc US Agg Bond TR USD 61.25%

BBgBarc US HY 2% Issuer Cap TR USD 10.50%

JPM EMBI Global Diversified TR USD 6.75%

MSCI US REIT NR USD 1.00%

MSCI EAFE NR USD 10.00%

Russell 1000 Value TR USD 9.88%

Russell 1000 Growth TR USD 9.87%

Russell 2500 TR USD 5.25%

MSCI EM NR USD 4.50%

BBgBarc US Agg Bond TR USD 45.25%

BBgBarc US HY 2% Issuer Cap TR USD 8.00%

JPM EMBI Global Diversified TR USD 5.25%

MSCI US REIT NR USD 2.00%

MSCI EAFE NR USD 20.00%

Russell 1000 Value TR USD 19.25%

Russell 1000 Growth TR USD 19.25%

Russell 2500 TR USD 10.50%

MSCI EM NR USD 9.00%

BBgBarc US Agg Bond TR USD 9.50%

BBgBarc US HY 2% Issuer Cap TR USD 4.50%

JPM EMBI Global Diversified TR USD 3.00%

MSCI US REIT NR USD 5.00%

2016

The Advisor’s Approach to Active Management for Headline Events

Donald Trump’s surprise victory in the 2016 U.S. presidential election showcases why advisors need to warn clients against trying to time the markets.

Not only did most political commentators expect him to lose by a substantial margin, a considerable number of market watchers assumed stocks would plummet if he did win. Although those political commentators were proven wrong, markets did swoon for a brief period before climbing upward in embrace of Trump’s economic policies.

The market climb also coincided with U.S. Treasury rates beginning to rise immediately after the election. Ten-year Treasuries rose from 1.88% on Nov. 8 to 2.60% on Dec. 15, 2016, before dropping to 2.45% by the end of the year.

While many advisors frequently stress staying the course with their clients, there are times when a bit of portfolio maneuvering can help. Sometimes disruptive events are marked on the calendar years in advance.

“The presidential election was the kind of situation where advisors using a proactive approach could have protected concerned clients by imposing trade limit orders on losses, options strategies to cover positions in case of a market sell off, or even short-term ETFs with an inverse relationship to the S&P 500,” says Alex Chalekian, CEO of Lake Avenue Financial, an RIA in Pasadena, Calif., that manages over $150 million.

Chalekian says while he does not indulge in market-timing, there’s a middle ground between doing nothing in the face of a major scheduled headline event and abandoning rational investment strategies. “Advisors who took the knee-jerk approach in hopes of avoiding a crash, by selling off large holdings for clients before the election only to find themselves buying back in at higher levels, shot themselves in the foot.”

Bar Graph

Steve Kaplan, head of portfolio insights for J.P. Morgan Asset Management, says that the intensity of the news flow on issues such as trade rhetoric and election battles makes it both impossible and unwise for advisors to react to everything.

“While advisors feel they may need to do something, portfolios should have a strategic long-term view based upon their risk profile and goals and make tactical shifts on the margins versus significant changes,” he says.

Advisors who abide a fiduciary responsibility would do well to apply behavioral finance and a “know your client” investment approach when managing clients through disruptive events, according to Kevin Scanlon, director of the Private Client Group at Stephens Inc., a diversified financial services firm based in Little Rock, Ark.

His advisors are more likely to “hedge” the portfolios of clients with a low tolerance for market swings, or a short-term investment horizon and need for cash. This may involve adjusting a client’s portfolio from a mix of 75-80% equities and 20-25% fixed income to a more conservative asset allocation of 60% equities and 40% fixed income.

There are clear benefits to staying in the market as opposed to attempting to time when to invest or pull out.

Kevin Scanlon, director, private client group, Stephens

“For clients with a high risk tolerance, significant resources, or an extended investment timeframe, we may recommend a ‘stay the course’ approach, rather than limiting upside or withdrawing from the market and related investments to protect the portfolio,” Scanlon says. “There are clear benefits to staying in the market as opposed to attempting to time when to invest or pull out.”

Brad Bernstein, a Philadelphia-based financial advisor at UBS, insists on always staying true to an investment strategy instead of trying to position clients for short-term events. Even so, he employs both strategic and tactical components to wealth management. The strategic component reflects a client’s risk tolerance, time horizon and cash flow needs. The tactical component responds to the day-to-day impact of economic, political, financial and tax considerations.

“It is important to have enough cash on hand to not have to touch one’s long-term and lifestyle portfolios during short-term market volatility,” Bernstein says. “However, after a significant move in the markets and at least once a year, we believe in rebalancing our portfolios to take advantage of the opportunities. This forces our clients to buy low and sell high and reduces risk.”

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