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Portfolio > Portfolio Construction

In a Stock Crash, How Much Are Your Clients Willing to Lose?

By Emily Zulz

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What happened in 2008 may be happening again.

So says Kendrick Wakeman, CEO of FinMason. And he’s trying to help spare investors from the crushing losses that many suffered eight years ago.

“We went into 2008, a lot of people had too much equity in their portfolio – too short to retirement, too much equity in their portfolio,” Wakeman said during a visit to ThinkAdvisor’s office. “I think we’ve got the same situation now. I think we’ve got people who are close to retirement and have too much equity. What we want to avoid at all costs, really, is a situation like in 2008 where people carried too much equity too close to retirement.”

Then in 2008, the market crashed, investors panicked and sold, and they “lost their path to retirement,” as Wakeman said.

“That’s the worst situation of all because showing up to your job every day knowing that you’ll never be able to retire is like trying to run a marathon knowing you’ll never be able to finish,” he said.

There are a lot of reasons people end up with too many stocks, but Wakeman explained two popular reasons.

“As the market runs up, if you don’t do anything, the value of your equities balloons and then you’ve got too much equity or more equity than you had before,” he said. “Also there’s … chasing performance. Where the markets are doing well, people think it’s going to do well and they tend to invest more in the markets at that point, which is not a great behavior.”

What needs to happen to make sure the devastation that came with the 2008 crash doesn’t happen again?

“I think everybody needs to assess how much risk should be in their portfolio,” he said. “That’s step one. And then compare it to how much risk they have in their portfolio. That’s step two. If those two things are pretty close, they don’t need to do anything. If there’s a big discrepancy, they need to do something and should probably do something sooner rather than later.”

With FinMason, a financial education company that formed in 2013 to provide investors with free access to their FinScore risk tolerance ranking, Wakeman is hoping to abate the disastrous effect of the 2008 financial crisis.

FinMason’s risk tolerance test is similar to an eye exam: Investors are shown different portfolios, how these portfolios would perform under different market scenarios, and asks them if they are comfortable with more or less risk than the previous selection.  From there, the investor can compare their risk tolerance score to their current portfolio to find out how it matches up. FinMason won’t tell the investor how to get to the right portfolio, rather encouraging the investor seek out professional advice.

“Crashes do happen. They happen with regularity. It’s fine. It’s part of financial life, but you need to make sure you have the portfolio that will get you out the other side,” Wakeman said. “Then you don’t have to worry.”

Wakeman and his FinMason team are also firm believers that the conversation about the potential effects of a market crash needs to happen with clients and investors from the beginning.

“One of the things that can help hold people in the market … is show your clients right from the get-go, show them how much they could lose in a crash,” he said.

“We believe strongly in foreshadowing, we believe that should be part of the client onboarding process and part of the client review,” he said. “Basically to say, ‘Here’s where we are. Here’s what could happen if we had a crash.’ And get them to buy into that.”

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