Is a drawdown around the corner? According to Gary Droz, the managing director of MainLine Private Wealth, his clients are “obsessed” with this question.
“Clients seem obsessed with ‘Is a downturn coming?’ Obsessed,” Droz said during a recent visit to ThinkAdvisor’s New York office.
Droz, who has worked in financial services for more than 30 years, helped form Mainline Private Wealth in 2011. The firm now has around $400 million assets under management and caters to the high net worth and ultra-high net worth.
(Related: New Strategy to Navigate Market Volitility, Sept. 21 webcast with Michael Finke)
As Droz wrote in a recent analysis, the market has been in a perpetual upswing for several months, which makes a drawdown likely in the near future.
And this is what he tells his clients.
“When a client says ‘don’t you think the market’s going to draw down?’ I say, ‘Of course it is! That’s what markets do,’” he said.
Drawdowns of approximately 5-10% are common in any market cycle, according to Droz, and often occur multiple times within the same calendar year.
Since 2009, the S&P 500 has had 24 drawdowns of more than 5%, MarketWatch reported.
This makes it easy to believe that a drawdown is likely inevitable, especially since the last drawdown of more than 5% occurred on June 27, 2016. According to Droz, this is the longest duration without such a drop in 20 years.
“We’re in an extraordinarily long period without a drawdown,” Droz said.
Based on these numbers, Droz says it’s impossible to think that a drop in the market is anything but imminent. But that doesn’t necessarily mean investors should feel uneasy about it.
“I just have to calm my clients down a little bit and say, ‘If the market doesn’t draw down, that’s when you worry. Because that’s a natural evolution in the market,’” Droz said. “It creates opportunities. It creates time for the market to then move forward later.”
As an investor, a downturn shouldn’t change their behavior. Droz reminds his clients that the likelihood of a drawdown should not alter their basic investment approach or asset allocation.
“Unless I had a client that had a huge liquidity event, I wouldn’t let it change any part of the investment strategy once we set up an allocation that fits them,” he said. “The key to my job is making sure that I understand who they are as investors.”
Provided clients have crafted a diversified investment strategy that takes into account their personal objectives, goals and risk tolerance, a downturn shouldn’t change their behavior at all, Droz says.
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