How Advisors Can Help Clients Mistakes During Downturns

The S&P 500 lost 1.3% in August, by no means a bear market. Not even a correction on the technical definition. Now, it’s September – one of the worst months of the year for equities. Next up is October, a month with its own dubious reputation.

So while it remains to be seen how risk assets perform over the final four months of 2023, now is an opportune time for advisors to review some of the classic mistakes clients make on their own when equity markets swoon. Many clients have discretionary accounts, separate from an advisor’s purview. Some have significant assets in these accounts.

They also make mistakes in these accounts. No one is infallible, particularly when it comes to investing, confirming that the help and guidance of a professional is always relevant. So let’s examine some of the classic mistakes ordinary investors make on their own when markets turn turbulent.

Panic Selling, Running for Cover

One of the quintessential mistakes retail investors commit is buying high and selling, which is amplified during pullbacks because selling into a down-trending market ensures and compounds losses. Fortunately, there’s a better way.

Take the long view. If you don’t need cash right away and have a well-researched, diversified portfolio, realize that downturns ultimately are temporary,” notes Morgan Stanley Senior Investment Strategist Dan Hunt. “The market may sometimes feel like it could go to zero, but market history shows that rebounds can return many portfolios to the black in just a few years.”

The other big mistake many market participants make of their own accord is going to cash during downturns only to never return to stocks or be quite tardy in doing so. Cash if fine and its merits are currently strong due to higher interest rates, but for many clients there’s a better solution to dealing with equity market retrenchment.

“Dollar-cost averaging, a method where you buy set amounts of stock at regular intervals (say, monthly) to get back into the market gradually, can be a good way to get there,” adds Hunt. “Dollar-cost averaging reduces the sensitivity of your portfolio to the luck of timing, which can make it easier for fearful investors to move out of cash, since they can avoid the worry of putting a big chunk of money into the market, only to have the sell-off resume. And if the market rebounds, they will be glad that they already put some of their money back to work, rather than having all of it on the sidelines.”

Avoid Cockiness, Compounding Mistakes

Some clients, particularly those in younger demographics, may be prone to overconfidence upon making a few winning trades on their own. However, advisors know that overconfidence can be problematic. On that note, advisors are integral in helping clients avoid the pitfalls of cockiness.

Next up is the issue of compounding mistakes. Left to their own devices, many clients will cut winners short and send good money after bad into losing positions. This is also prime territory for advisors to add value.

“Losses arise in a taxable investment account, ‘harvesting’ them by selling those positions can improve long-term tax efficiency,” adds Hunt. “Also, many investors are better off converting at least some of their retirement savings from a traditional IRA to a Roth IRA. Since there are tax consequences, doing a conversion when stock values are depressed could be a good move. This, again, is something a Financial Advisor can help with.”

Related: Advisors Need To Know This About Younger Clients