A Pep Talk for Financial Advisors on Investing in a Declining Market

3 min read
November 27, 2023

October ended with the S&P 500, Russell 3000, MSCI World Ex USA, MSCI Emerging Markets, and DJ Global Select REIT in the negative for 1-month and 3-month periods, so some clients will certainly be ready for us to answer the question, “What is it this time?” 

The beauty of our approach—building investment strategies based on academic research and rebalancing back to the target risk tolerance as markets move—is that we can find comfort in these times by revisiting the core tenets of our belief systems. 

Without downplaying the importance of every political and economic crisis the markets navigate, the reminder is that the global roster of companies that represent our typical portfolios always finds a way out. In the aggregate, they find a path to long-term profitability. 

Once you come to believe that as staunchly as we do, you’ll find great freedom and confidence in your ability to invest without fear of the next big dip or recession— always assuming, of course, that you’ve done so at an appropriate risk tolerance warranted by your clients’ willingness, need, and ability to take market risk.

Six Tips for Fearless Investing:

1) Asset allocation is the primary driver of investment returns

The best part of this first tenet is that it’s within your control. This should provide genuine comfort to even the most nervous investor given that you can proactively choose and adjust your asset allocation well in advance of bad markets. Admittedly, many investors aren’t taught this concept, but those who have been lucky to learn this lesson early in their investing journey can rest easy knowing they’ve thoughtfully allocated their money to meet their risk tolerance.  Additionally, in a regular rebalancing program, we advise returning the portfolio to its intended asset allocation even when it feels counterintuitive. When equities decline, for example, the prudent approach to rebalancing would be buying additional equity to return to its targeted levels.

2) Total return is superior to investing for income/yield in most cases

We put equal value on the capital appreciation in a portfolio and any income produced, without preference for one over another. This alleviates any pressure to extend the quality of the bond portfolio in low-interest cycles and overweight to bonds to achieve a desired income threshold. As a result, this reiterates the importance of asset allocation over all else.

3) Low-cost index or index-like funds often prevail in traditional asset classes 

Considering the value paid for an investment is critical to the success of any investment strategy, and we typically only justify a more expensive option when it exposes additional tilt to factors where premiums are likely.

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4) Global diversification is key  

We see equal opportunity in the US and abroad and choose to leverage international investments in our portfolios for geographic, political, and economic diversification.

5) After-tax returns are the best measure of success 

Some of the primary tools we use to reduce or manage taxes are:

  • Asset location – buy bonds in tax-deferred accounts first to protect the portfolio from income distributions.
  • Fund choice – buy ETFs when possible and available for their more tax-sensitive design.
  • Allowance for drift – building in ranges for your model targets helps minimize trading and capital gains
  • Tax-sensitive bonds – implement fixed income using municipal bonds when forced to buy in an after-tax account and when justified by the investor’s tax rates. 
  • Tax-loss harvesting – leveraging thoughtful alternates in a model portfolio to replace at opportune times can help offset capital gains.
  • Avoiding short-term gains – we are always monitoring the impact of capital gains on portfolios and rebalancing, especially whether any gains are short or long-term.

6) Cash that will be needed in the foreseeable future should be carved out of the portfolio 

If investors have their eye on a big spend in the near future, those dollars should be set aside from the investment portfolio well in advance. This will help avoid the forced sale of stocks after a big market decline.

Pep talks aren’t the only thing we’ve perfected here at XYPN Invest (formerly XY Investment Solutions).  We’re also told we’ve built an incredibly flexible and robust trading platform that puts advisors back in control of their portfolios. Unlike most TAMPs—where everything is a trade-off—our advisors can define capital gain thresholds, request ticker swaps, and maintain and incorporate legacy holdings inside of managed portfolios. 

If you’d like to find out more about how we can implement tax-efficient trading for your clients, reach out. Like co-pilots, we can work together to bring your clients safely to their destination no matter what turbulence may lie ahead.

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About the Author

Jeff Snodgrass is the Managing Director of XYPN Invest, which provides turn-key investment management solutions for time-savvy advisors ready to streamline their investment process. Jeff's favorite part about his job is connecting with the advisors XYPN Invest serves and hearing stories of the success and achievements of their clients. When he's not optimizing the Invest client experience or sharing his vast wealth of Orion knowledge, Jeff steeps himself in music—he's played the piano for 25 years and enjoys listening to live music. He also stays busy being the "best dad ever" to his four young kids.

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