This post was authored by Adem Tumerkan, Dunham's Content Writer. If you have questions concerning today's topic, please call us at (858) 964 - 0500. Hold us to higher standards.

As a financial advisor, an important duty you have is to try and steer clients through the turbulence in their financial planning and investment needs - whether it’s helping them prepare for retirement and cash flow management or tax planning and positioning wealth in a way to be passed down smoothly.

But there’s one spot that is generally the most stressful for clients.

And that’s during market downturns – also known as bear markets.

·         A bear market is when a market experiences prolonged price declines. It typically describes a condition in which asset prices fall 20% or more from recent highs amid widespread pessimism and negative investor sentiment.

There have been 13 of these bear markets since World War Two – the most recent being the 10-months¹ between January and October 2022 (not visualized above).

And 2018 was dangerously close to entering a bear market – a steep sell-off in 2018 left the S&P 500 just 0.2% from officially hitting² a bear market (-19.8%).

In fact, the S&P 500 was down 9% and the Dow was down 8.7% in December 2018 — marking the worst³December since 1931.

Making matters more interesting is, if we include the close call in 2018, there’s been three bear markets in the last four years.

Now, during these periods, clients may feel nervous and overwhelmed with their plans.

For instance, imagine if you were planning to retire in 2007, only for asset prices to fall sharply over the next two years (2008-2009) during the Great Financial Crisis.

Downturns can quickly eat away returns (as we’ve written about before highlighting the ominous volatility tax⁴).

But it also may present an opportunity for clients.

Thus, as a financial advisor, it’s critical to understand your client and the kind of strategies that are necessary for them during such times - wherever and whenever they may happen – and to prepare ahead of time.

So, let’s get into it.

The Three Pillars: Preparing Clients For Potential Bear Markets

Now, who knows what will happen – but periods of market drawdowns or volatility won’t go away. Boom and bust are seemingly fundamental in market structures.

Thus, market downturns require a strategic approach centered around three key pillars – such as:

1. Proactive Planning and Strategic Investment: Encouraging clients to adopt proactive planning strategies is essential. It’s also important to emphasize the significance of diversification, asset allocation, and a long-term investment approach.

As you know, diversification aims to spread risk across various assets, while asset allocation aligns investments with individual risk tolerances and goals.

This approach can increase resilience in portfolios, cushioning the impact of market volatility.

Discussing risk tolerance enables the customization of investment strategies, ensuring they align with clients' comfort levels during volatile times.

2. Knowledge Empowerment and Understanding Market Patterns: Educating clients about market cycles and historical patterns is crucial.

This knowledge helps understand market behavior and may alleviate anxiety during downturns.

By going over case studies or success stories of portfolios that effectively weathered market downturns, clients may gain reassurance and confidence in their financial strategies.

This understanding encourages a disciplined approach, and hopefully prevents impulsive decisions driven by fear or panic.

Even better, understanding this may turn a downturn into an opportunity for clients.

3. Communication and Relationship Strengthening: there’s a pivotal role of communication between advisor and client during turbulent market phases.

In fact, as I recently wrote⁵ about, clients seem to care much more about clear, concise, and personalized communication than actual market returns.

Thus, establishing clear lines of communication helps set realistic expectations about market behavior.

Things like regular updates, discussions, and timely guidance during these periods are essential. This proactive communication strengthens the advisor-client relationship, fostering trust and ensuring clients feel supported and informed.

By focusing on these three pillars – proactive planning, knowledge empowerment, and effective communication – financial advisors can better equip clients to navigate market downturns with resilience and confidence.

In Conclusion

Navigating market volatility presents challenges but also opportunities.

Thus, by understanding your client, and having a clear strategy, financial advisors may better steer through market turbulence - ensuring they remain aligned with their long-term financial objectives.

Recognizing the unique needs of each client is pivotal.

These downturns, marked by prolonged price declines, can induce stress and uncertainty among clients.

So be prepared to help guide them – before it begins and after.

If you enjoyed the quality of our charts and insights, or are interested in our Bull and Bear whitepaper series for your clients, please reach out to the Business Development Team at Dunham.

Phone: (858) 964-0500 or email us here.

Sources:

1.      https://www.cnbc.com/2019/12/31/the-stock-market-boomed-in-2019-heres-how-it-happened

2.      Forbes - A History Of U.S. Bear Markets – Forbes Advisor

3.      https://www.cnn.com/2018/12/31/investing/dow-stock-market-today

4.      https://dunham.com/FA/Blog/Posts/the-volatility-tax-and-antifragile

5.      https://www.dunham.com/FA/Blog/Posts/client-retention-financial-advisors

Disclosure:

This communication is general in nature and provided for educational and informational purposes only. It should not be considered or relied upon as legal, tax, or investment advice or an investment recommendation, or as a substitute for legal counsel. Any investment products or services named herein are for illustrative purposes only and should not be considered an offer to buy or sell, or an investment recommendation for, any specific security, strategy, or investment product or service. Always consult a qualified professional or your own independent financial professional for personalized advice or investment recommendations tailored to your specific goals, individual situation, and risk tolerance.

Asset allocation, which is driven by complex mathematical models, should not be confused with the much simpler concept of diversification. Asset allocation cannot eliminate the risk of fluctuating prices and uncertain returns. Rebalancing may be a taxable event.  Before taking any specific action, be sure to consult with your tax professional.

Dunham & Associates Investment Counsel, Inc. is a Registered Investment Adviser and Broker/Dealer. Member FINRA/SIPC.

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