Advisors More Than Ready for Faltering Economies

 

The world's central banks are stepping up efforts to deal with their respective slowing economies.

For instance, the European Central Bank (ECB) – as part of an effort to boost the euro-zone’s faltering economy – today cut its main interest rate to a historic low of 0.75%. And in a move that could help thaw frozen interbank markets, the ECB also cut its overnight deposit and lending rates by 0.25 percentage point each, to 0% and 1.5% respectively. “Cutting the deposit rate could encourage banks to lend out excess funds overnight rather than stashing them at the ECB,” the Wall Street Journal reported.

Meanwhile, China's central bank lowered its main interest rates and the Bank of England announced it would step up its bond-buying program to help stimulate the economy.

In light of those actions by some of the world’s central banks and the reality that the world’s major economies are slowing down, we posed this question to advisors: What are you doing or what do you plan to do to protect your client's financial plans and portfolios?

Here’s what they had to say:

In many cases, advisors say they’ve already positioned their client’s portfolio for an economic slowdown. “Our portfolios are already broadly diversified to include alternative investments to smooth out market risk,” says Reginald A.T. Armstrong, CPWA, president of Armstrong Wealth Management Group.

His firm, he says, uses a valuation-modified moving average cross-over system (called WealthProtect) to help decide when to exit and enter markets. U.S. domestic equities, REITs, developed foreign, emerging markets, and natural resources are all separately tracked.

And in early June, Armstrong says his system “triggered to exit the developed and emerging foreign markets as well as natural resources.”

Depending on the model, Armstrong says his firm left some of the proceeds in cash and re-positioned the majority of the sold assets into an S&P 500 index fund, an investment-grade corporate bond fund and a global macro alternative investment.

So, for example, a portfolio that had been 56% equities, 29% fixed income, 10% alternatives and 5% cash is now 40% equities, 34% fixed income, 15% alternatives and 11% cash, with just about all equity exposure to foreign markets removed, Armstrong says. “Further reduction in equities would be driven by domestic and real estate equities deteriorating,” she says.

Armstrong also says his client’s portfolios are well positioned should the U.S. economy slow down and fall back into a recession. “First, our portfolios are already positioned with about 30-38% less in equities than normal,” he says. “Second, equity markets normally break down ahead of when a recession becomes apparent and usually do so over several months. While there is no guarantee, I believe our methodology would help reduce the downside risk of recession-induced bear markets.”

John Sirois, JD, MBA, CFP, CIMA, CIMC with Raymond James Financial Services, Inc.  is also among those advisors who’s been proactive with his client’s portfolios in anticipation of slowing economies. For instance, he says he focusing more on high-quality, dividend-paying companies in addition to some high yield bonds. “The income component of these securities is a major component of the total return, especially in difficult markets,” he says. “We have also allocated more to U.S. companies as this appears to be the ‘least worst’ place to be with the problems going on in Europe.”

Sirois also follows a tactical approach that would include raising some cash if the market violates certain technical guideposts we follow.

David J. O'Brien, MBA, AIF, CFP of O'Brien Financial Planning, Inc. has also positioned his client’s financial plans and portfolios for an economic slowdown.

“My clients' plans have taken into account a slow growth scenario for the past couple of years,” O’Brien says.  “This is more than managing their expectations, it's about taking actions to find growth and income alongside lowered capital market assumptions.  Once we agree that the economy may not be the sole source of growth, we can pursue total return through other methods -- approaches that deliver each year, regardless of the economy.”

From a portfolio strategy standpoint, O’Brien says he been emphasizing higher yielding fixed income and higher dividend stocks and stock funds.  This includes investment-grade Asian bonds, shorter-duration U.S. bonds, preferred stocks and even master limited partnerships (MLPs).  “Depending on a client's investment policy, I will seek out a high portion of the total return from the income producing components,” O’Brien says.

From a planning standpoint, O’Brien says he’s aggressively pursuing ways to reduce the costs to my clients.  “This starts with the obvious costs from custodial and fund fees,” O’Brien says. On top of that, he’s looking for the most tax-efficient approach to rebalancing and using location optimization to eek out more return from tax-efficiency.  (He says this is possible with new technology from Total Rebalance Experts.) 

And for clients with college-bound children, O’Brien says he’s looking heavily into ways to reduce the cost of college through optimally structuring their assets.  “Knowing which assets are assessed against the family when determining financial aid helps us make decisions like reallocating taxable accounts into home equity instead of taking a loan for home improvement,” he says.

All these efforts should prove beneficial as the economies of the world slow down. “Just like a well-run business, we need to help our clients see bottom-line positive results from growth, income and a myriad of cost savings,” says O’Brien.  “This is an important part of how diligent financial planning makes a big difference in our clients' lives.”

Other advisors have done nothing, or at least nothing recently.

“We’ve assumed and planned for a slower global economy since 2008 and have not seen anything to support a change in that outlook,” says Geoff Kanner, CFP of Kanner Financial Services LLC.  “We’ve have not taken, nor do we plan to take, any special actions based on the decisions of the European Central Bank and the Chinese Central Bank.”

What’s more Kanner says repositioning client plans and portfolios in reaction to the news of the day is not productive. “I believe that acting, or being forced to react, to this type of news would put our clients ‘behind the eight-ball,’” he says “Knee jerk reactions are not helpful.”

Instead, he prefers to consistently monitor portfolio and models and rebalance on a regular basis to their target allocations.  “We keep our clients diversified across and within asset classes, look for appropriate non-correlated assets and use varied investment strategies for clients,” Kanner says.

What have you done to protect your client’s financial plans and portfolios in anticipation of the world’s major economies slowing down? Share your story with your peers in the comment field below.

 

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