Message to clients: Stay the course

Should clients stay the course in anticipation of making further gains? Should they take money off the table by selling some of their winners? Should they rebalance their portfolios to bring them in line with their original asset mixes?

Or should they simply do nothing and allow the markets to run their course?

There is no straightforward answer to these questions. Clients have different personal circumstances, risk tolerances and goals. But there are a couple of ways that you, as a financial advisor, can help.

First, head off rash investment decisions that your clients might be making in the heat of the moment. Second, be prepared to rebalance or make small course corrections to portfolios’ asset allocations to stay true to clients’ plans.

Regarding investment decisions, you have a crucial role to play in helping your clients “take the emotion out of the investing equation,” says Steven Belchetz, president and chief investment officer with T.E. Investment Counsel in Toronto.

Instead of allowing fear and apprehension to influence your clients’ decisions, you should help your clients make sure that their investment strategy aligns with the goals they are striving to achieve, says Dan Hallett, vice president and principal with Oakville, Ont.- based HighView Financial Group.

Hallett acknowledges that some clients may fear the ride will come to an abrupt halt in the form of a market correction, forcing portfolios to lose some of the gains they made. “You can’t predict short-term market movements,” he says. “And you can’t reliably time the markets.”

Regarding the need to make portfolio adjustments, clients and advisors alike should note that market volatility – perhaps even a pullback – are distinct possibilities in the current unsettled environment.

Trump’s stated policies, such as boosting infrastructure and defence spending, instituting protectionist trade measures and lowering corporate and individual taxes, generally have been viewed favourably by investors. But his domestic policies – from trade to health care, environmental issues to immigration – could create less than optimal conditions.

Trump has moved to pull the U.S. out of the Trans-Pacific Partnership trade agreement, given notice that he wants to renegotiate the North American Free Trade Agreement and has set the stage for a faceoff with China over trade – all of which could affect global trade and thus equities markets. His foreign policy, especially his apparent closeness to Russia, also could disrupt markets.

Hallett cautions that equities’ valuations are elevated already, although not significantly. At the end of 2016, stocks in the TSX/S&P composite index traded at 22.7 times trailing earnings vs the 10-year average of 18.5 times and the 20-year average of 20 times. In comparison, stocks in the U.S. S&P 500 composite index were trading at 20.5 times trailing earnings vs the 10-year average of 16.9 times and the 20-year average of 19.5 times.

However, the risk of market volatility – or a correction – doesn’t mean that your clients should reduce or eliminate their equities exposure, Belchetz says. Rather, your clients should “stay the course and remain invested” to take advantage of further potential upside. He notes that when investors exit the market temporarily, “they get back in too late.”

Heather Holjevac, senior wealth advisor with TriDelta Financial Partners Inc. in Oakville, Ont., recalls a case of one client who insisted upon selling assets and moving into cash prior to the U.S. presidential election, thus losing out on the recent surge in equities prices.

Hallett suggests there could be some cases in which reducing equities exposure is wise. For example, if a client has particularly short-term goals, taking on more risk would not be prudent. In such a case, reducing equities exposure may be the best course of action.

Rebalancing portfolios by trimming certain asset classes to bring your clients’ portfolios into line with their original asset mix might be necessary, says Belchetz. In today’s situation, that would mean moving some money out of equities and into other asset classes because the market value of the equities component of portfolios would have risen sharply.

Says Holjevac: “You have to keep some principles in place by ensuring that clients’ asset mix remains suitable, based on their individual risk tolerance.”

Hallett, however, says that rebalancing client portfolios should be carried out only if a rebalancing has not been carried out within the past five years – unless a client feels particularly strongly about reducing equities exposure.

North American markets have been rising steadily since the election of Trump in November. On Jan. 24, both the S&P 500 and the Nasdaq closed at record highs. On the following day, the Dow Jones industrial average crossed the psychological record 20,000 mark, while the TSX/S&P composite index also flirted with a new record high, but fell just short.

Investors are anticipating increased spending by the U.S., Hallett says, potentially leading to higher inflation, which would be positive for stocks. A solid start to the earnings season also has contributed to higher stock prices.

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