Have you ever listened to an academic or a "quant" and found yourself wondering if you truly understood everything they said? Or, as an advisor, have you ever found value in listening to a smart, credentialed colleague and wished for an academic overlay to those well-founded comments?
The purpose of this ongoing series, which is exclusive to ThinkAdvisor, is to provide our readers with two distinct perspectives on the same topic – one from an academic, the other from a practicing financial advisor. In "The Advisor and The Quant," we will pose one specific question to the advisor and the quant. You will see their responses here on ThinkAdvisor.
If you have a question or two, please send them to us using the form at the end of this article.
Learn more about The Advisor, Joe Elsasser, CFP, and The Quant, Ron Piccinini, Ph.D.
QUESTION: A market crash is inevitable. What should advisors and their clients do now to be prepared?
JOE ELSASSER, CFP, PRESIDENT, COVISUM:
Few would argue with the old adage "Practice makes perfect."
We've all been through a few market crashes: Black Monday, the tech bubble, the Great Recession … yet each one feels new. Why? Because our life circumstances were different at each point when we encountered a substantial market dip.
Let's pretend I am 65 years old and on the cusp of retirement today. In that case, I was only 56 when Lehman Brothers collapsed. I may have been looking closely at what I needed to retire and pushing hard to get there, wondering if I'll need to work a little longer or if it's possible to retire a little early. I was only 35 for Black Monday and 45 while watching my tech stocks go in the tank. At each point, my life circumstances were completely different than they are today.
Now, at 65, I very well may be considering retiring from an income I would be unlikely to be able to get back if I had to return to work. My questions are completely different than they were years ago, and my anxiety level is much higher.
If I am considering retiring now, at age 65, I want to know if I'll be OK if the market goes in the tank. Will I be able to continue to live my life the way I want to?
It is inevitable that another bear market will happen. If history is any indication, the likelihood is that it's coming sooner, rather than later. The last thing 65-year-old me wants to do is watch the market dip to the point that I have to make major adjustments to my lifestyle, or possibly worse, sell out of my investments and forfeit the ability to recover.
How can I create a realistic way to evaluate real-life situations and have confidence that I will be OK, even if the markets turn against me at precisely the wrong time?
A well-equipped financial advisor can help clients "practice" for the inevitable downturn. New market risk software products help advisors reasonably assess the downside risk of an investment portfolio and test the client's retirement income plan to determine whether or not the client would likely be faced with unacceptable changes in living standard. The beauty of a market at historical highs is that it is the perfect opportunity to do just that. And in the event the client can't withstand the downside impact of their current investments, a good advisor can help them reposition to a portfolio that is more aligned with their ability to accept risk.
