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.