Assessing the situation

Advisors don't have to look back far to determine how well their clients' portfolios might handle a market drop. Analyzing performances from March and April of this year may provide plenty of information. One may want to start by conducting a full assessment to determine how they might be able to take advantage of a potential second chance in the market. Looking at how the portfolio has performed and the components that seem most sensitive to market fluctuations can shine a light on what aspects might need to be realigned to meet a client's needs, including their risk tolerance and financial goals.

A few questions advisors can ask themselves while conducting this assessment include:

• Can the portfolio withstand the same level of risk for a year or more?
• Can the investor tolerate the same level of decline experienced in March?
• What would be ideal portfolio returns during a significant decline vs. an acceptable level of returns?
• What is the anticipated lifetime of the investment?
• Since an investor's long-term plans may impact the strategy to achieve their goals, when is the investor planning to retire?

Once advisors feel prepared with the answers to these questions, they can begin discussing portfolio changes with their clients, in an effort to potentially take advantage of this second chance and prepare clients for what may be a devastating market event.

Guiding investors

When beginning this discussion, advisors might want to outline the major threats that may impact the finances and lives of clients. Investors today are faced with several pressing, volatile factors like the progression of COVID-19, the results of the U.S. elections, uncertain geopolitical events and more.

After identifying which threats seem most pertinent, advisors may look to guide clients toward the investment opportunities potentially provided by these factors, positioning part of a portfolio to attempt to capitalize on them. Investors planning for long-term goals like retirement may want to hedge their portfolios against worst-case scenarios, so market developments that might otherwise put their goals at risk could serve to further them instead.

By reassessing the risk clients are willing to sustain in the long term compared to risk they have already endured, advisors can attempt to better position portfolios. This reassessment may spark a conversation on reallocation, such as whether the traditional stock/bond formula still meets their needs. For example, in today's Fed-driven market, near-zero rates may sway investors away from the old-school 60/40 allocation and toward alternative strategies that could offer higher rewards.

However, if equities take another nosedive, risk managed strategies may serve as a crucial addition to the portfolio. The principal goal for repositioning portfolios should be to attempt to manage risk. The second goal is to then achieve potential upside exposure. Every client is different, so use this time when the memory of a steep downturn is still fresh to discuss risk with them.

The value of providing forward-thinking portfolio planning

At the end of a successful journey to a secure retirement, investors probably won't dwell on the specific quarters in which their returns came up short or they suffered more losses than anticipated. For most, long-term success is the ultimate goal. Although no advisor can guarantee their client's success, forward-thinking portfolio planning may be the most valuable asset an advisor can provide.

No one can predict the future, but advisors can attempt to help their clients prepare for, and potentially benefit from, the unknown by taking the necessary precautions now.

Prior to becoming managing director at Toews Asset Management, Eben Burr consulted for private equity and high-net-worth individuals in New York City real estate. Eben serves as a lecturer and coach of applied behavioral finance for Toews' Behavioral Investing Institute, where he assists in training advisors to build a process for managing investor behavior.