As Bear Market Looms, Advisors Turn To Trusted Survival Tactics

Since President Trump announced new tariffs on April 2, worldwide financial markets have been on a rollercoaster ride. Prognosticators and pundits warn of a recession, a bear market, a rise in inflation and other dire consequences, leading many investors to panic.

In this tumultuous economic environment, what are advisors telling clients? What are their tips for surviving the storm?

“Clients don’t respond to clichés and empty phrases like ‘don’t panic,’” said Brian Schaefer, a vice president and portfolio manager at Johnson Financial Group in Milwaukee. “This is when building trust through active listening and consistent communication over the years pays off. … It forms the foundation.”

It’s important to acknowledge clients’ feelings of stress and anxiety, which are normal reactions, advisors said. But then, it might help to remind them that their financial plan incorporates strategies for coping with volatility, such as emergency reserves, allocations to conservative assets and other buffers against unpredictability.

“Show clients why they shouldn’t panic,” said Leo Marte, an advisor at Abundant Advisors in Huntersville, N.C. “Dealing with down markets and volatility is part of being an investor,” he tells clients. “This won't derail our work to achieve your goals.”

Rash, impulsive decisions that go against a long-range plan are always a mistake, experts say. Clients who clamor for fast action should be reminded of what happened during and after the Covid pandemic, said Edison Byzyka, chief investment officer at Credent Wealth Management in Auburn, Ind. “Many have forgotten the emotions that begged them to exit the markets in March 2020,” he said, but those who stood fast and stuck with their long-term plan achieved “tremendous success” just a few years after. “Despite our desire to think it's different this time, history is repeating itself."

To be sure, clients who are in or near retirement have the least time to recover from losses—and perhaps the most valid cause for concern. Nevertheless, advisors insist, the worst thing for them to do is “panic sell” assets that were intended for long-term growth, which effectively locks in losses and jeopardizes future retirement income potential.

Instead, retirees and pre-retirees should work with their advisors to review their income expectations, said Lori Van Dusen, CEO of LVW Advisors in Pittsford, N.Y. “Do they have enough cash or low-volatility assets to weather the storm without selling stocks at a loss? Do they need to adjust [their] spending temporarily?” she continued. “Staying flexible and focusing on what they can control—like spending, taxes and rebalancing—is more powerful than trying to predict the market.”

At the same time, while some clients might be feeling terrified, others may see stock sell-offs as buying opportunities, with shares at bargain prices.

While that may be true, advisors say it’s dangerous to try to time the market. Stocks could keep going down. “From a valuation perspective, [the market] is still not cheap,” said Jack Gunn at Ullmann Wealth Partners in Jacksonville Beach, Fla. “Before clients jump into the market thinking stocks are on sale, we ask them to ignore the recent selloff and look at the current state of the market objectively.”

He added that he is bracing for more volatility throughout the year.

While this might not be the best moment to buy or sell stocks, advisors contend that big market shifts are an apt time for rebalancing client portfolios. Clients may suddenly find, for instance, that the value of their fixed-income assets now exceeds that of their equities, whereas they had been 50-50 before the downturn.

Bull and bear markets can be opportunities “to make sure your long-term asset allocation is on target,” said Schaefer at Johnson Financial. “Larger market moves make rebalancing even more valuable.”

In addition, this might be an ideal occasion for clients to convert their pretax retirement accounts such as IRAs to after-tax Roths, advisors say. Traditional IRAs and 401(k)s reduce income taxes when they are first funded, but taxes are due when money is withdrawn in retirement. Roths, however, don’t reduce taxes when funded, but from then on they are tax-free. They are also exempt from the required minimum distributions that force holders of traditional retirement accounts to make taxable withdrawals every year starting at age 73.

Roth conversions are especially sensible for clients who foresee being in a higher tax bracket in retirement. The only downside is that they have to pay taxes on the conversions.

Some advisors argue that Roth conversions are also part of a prudent bear market strategy. When markets are down, they explain, the taxes due on the conversions are lower because the value of the original retirement account is temporarily depressed.

“Down markets create ideal windows to convert beaten-down assets to Roth IRAs,” said Anne Marie Stonich, chief wealth strategist at Coldstream Wealth Management in Seattle. “You get more shares over at lower values, maximizing future tax-free growth. The same logic applies to gifting stocks to children—depressed prices let you gift more within the same limits.”

But this advice isn’t necessarily appropriate for every client. Some advisors insist that the decision of whether or not clients should make Roth conversions must not overlook such considerations as the client’s expected future tax rates and where the client falls on their retirement timeline. The older they are, the less likely a Roth conversion makes sense, they say, but younger clients with many years left in the market would benefit the most.

Ultimately, the decision “should be based on a client’s living-and-breathing financial plan,” said Credent’s Byzyka, rather than on short-term market dynamics.

Another piece of bear market strategy is tax-loss harvesting, advisors say. It’s a way of selling a client’s investments at a loss to offset the capital gains taxes owed on other investments at the end of the year. The funds can then be used to buy other (ideally undervalued) assets and maintain the portfolio balance while reducing taxes.

“A market downturn is always a buying opportunity,” said Alicia Fuller of Coastal 360 Capital Advisors at Steward Partners in Naples, Fla. “However, so much more goes into this strategy.”

Like many market watchers, she anticipates more choppy waters ahead. “Tariff negotiations never go smoothly, and there are so many countries in play that this will take some time to sort out,” she said.

But she for one is maintaining a long-term view. “I’ve seen many market pullbacks in my many years in this industry,” she said. “What is always the case is the resiliency of the markets and [their] ability to come back to levels higher than before.”

As seen in fa-mag.com.