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3 Strategies to Worry-Proof a Client’s Portfolio

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Behavioral finance has established that even the strongest and most dedicated of investors are prone to panic when markets get rough. As such, one of the greatest challenges financial advisors face is trying to keep their clients engaged in markets at all times.

While a solid, well-thought-out and well-constructed financial plan is of the essence, getting investors to stick to it can often prove frustrating no matter how strong and close a relationship an advisor and a client may share.

That’s why advisors need to have at the ready a number of airtight investment strategies designed to keep their clients engaged while providing them with the peace of mind they need to actually stay engaged, according to John Longo, CIO at Acertus Capital Management and a finance professor at Rutgers in New Jersey.

“Advisors need to get investors to stay in the markets and feel comfortable at all times, and for that, dollar cost averaging is a good technique,” Longo said.

Based on that, Acertus Capital Management uses ETFs and options to sculpt a series of risk-return options that give the firm’s clients downside protection in turbulent markets while also giving them some upside benefit and, above all, assuage their concerns when markets go awry.

The upside is capped at a certain level, Longo said, “so there’s no free lunch, but these strategies still give our clients some peace of mind, which is extremely important for keeping them engaged in the market at all times.”

Taking the S&P 500 — which is widely used and not only represents the U.S. equities market but also offers meaningful international exposure — as a benchmark, the firm proposes three “peace of mind” strategies.  

The first is designed to consistently outperform the S&P 500 on a risk-adjusted basis in both rising and declining markets. It’s structured to deliver high single-digit to low double-digit returns in rising markets, while reducing losses in declining markets. It works well for investors who want to mitigate market volatility and buffer losses, Longo said, while increasing the probability of earning attractive returns.

The second is designed to consistently outperform the S&P 500 in most rising markets, delivering returns in the mid-teen to mid-20 percent range in rising markets, while posting returns equal to the S&P 500 price decline in falling markets. It works well for investors who want to enhance returns without increasing downside risk.

And finally, the third is designed for a “black swan” market environment, Longo said. It’s structured to allow market participation in the low- to high-teens range in rising markets with less volatility, while substantially reducing losses in markets that suffer abnormally steep declines. This is an attractive strategy for investors seeking to mitigate normal market volatility and reduce losses during severe market breaks while enjoying linear, market-like price appreciation.

All three strategies eliminate the temptation to make the emotionally flawed investment choices that all investors are prone to making, including buying at market highs and selling at market lows. Investors derive comfort from knowing that they don’t need to time the market but can stay engaged and invested in it at any time, Longo said, without suffering too many losses to their portfolio.  

Determining which strategy to use for individual clients depends largely on their risk tolerance levels.  

“We try to get to know our clients and their goals and objectives first, and then we try to understand their risk tolerance,” Longo said. “We get very rich clients, for example, who don’t want to lose money, so that makes for a more conservative investment portfolio. What’s important overall is that we have all three strategies at our disposal. Depending on each client, we turn the risk-return dial to a place where a client has peace of mind.”

Longo believes that today, more than ever, investors need to stay engaged in the market at all times. Capital preservation has become much more important in today’s markets, he said. While it’s clear that advisors still need to make sure that they work on building a strong and lasting relationship with their clients, they must have practical solutions and offerings to deal with investor behavior and give investors the peace of mind they need.

Read more about behavioral finance on ThinkAdvisor.