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As much as they'd like to, advisors can't always protect clients from market losses.  But they can help clients avoid emotionally-based decisions that can exacerbate those losses. And, they can build client portfolios that might slow or divert an account's otherwise downward spiral.

When markets are selling off, clients who fear that losses will continue often jump to preserve their capital by selling their positions. Unfortunately, there's a downside to this strategy. Selling as markets are falling, while it may halt more losses, means investors are on the outside looking in should prices turn back up. This might explain why research published in Dalbar's 20th Quantitative Analysis of Investment Behavior, 2014, showed that investors tend to lose more of their potential returns after – as opposed to during – market declines. But the impulse to cut and run is strong, especially among older clients with lower risk tolerance. They worry that they could deplete all of their investments and not have time to build their savings back up. Retired clients, who are drawing down savings, are more likely to have an even narrower risk window.

Clients may also make hasty decisions, whether in a rising or falling market, since it's the market volatility that prompts emotional behavior. Clients can be compelled to buy into a high risk investment, even at the peak of its market price, in the hopes of making gains quickly. Normal caveats may not penetrate the heart-thumping euphoria surrounding a new issue's climb. Dalbar's research shows that these investors tend to get in late (when the price is high) and sell when the share price is falling. Emotionally driven decisions, whether the trigger is greed or fear, can produce unnecessary losses. “Clients, especially those closer to their savings goal dates, have to be more guarded about investment decisions,” said Frank Muller, executive vice president and head of distribution for investment management firm Behringer. “This is where expert, caring counsel can make a real difference in their lives.”

Technology is powerful and has relieved firms of hours of tedious labor. But it can't replace the human touch. Advisors can serve as a conduit for credible, balanced and reliable information. “By knowing their clients personally, checking in with them by phone on a frequent basis and establishing, discussing and tracking goals with them, they can help clients stay on track through market ups and downs,” said Muller.  Listening and sharing knowledge is vital, as are providing disclosure and education, both integral parts of this human interaction.

Advisors can also defuse clients' fears, reduce their reactions to emotional triggers and mitigate subsequent losses by offering better portfolio construction strategies. “A portfolio that is diversified with investments that move in a non-correlated direction from the traditional equity and fixed income markets generates fewer peaks and troughs during market upheavals,” he said. “With less volatility in the portfolio, clients are less likely to make impulsive, defensive decisions.”

For example, a portfolio that contains public debt and equity can be expanded by incorporating private debt and equity where appropriate. A carefully balanced combination of traditional stocks and bonds, adjusted to fit the unique needs and goals of a client, can be combined with non-correlated assets, such as shares in private funds that loan to a variety of entrepreneurs, from healthcare researchers to the next Steve Jobs. These alternative assets can be selected to be remote from the events affecting other portfolio components, so that a major drop, in, for example, retail merchandise sales or new housing starts, might be offset by an infrastructure fund, for instance. Similarly, a real estate investment trust that caters to commercial rentals may prove a good balance to a languishing residential housing market. Such counter-balancing investments can smooth out investment performance, and thereby encourage clients to stay the course during downturns.
A more diversified portfolio would reflect what the whole economy looks like. "If advisors only look at what is publicly traded, they’re blinding their clients to the rest of the real world,” said Muller. “The more they open their clients’ eyes to how the full market looks and operates, the more it gives advisors options for growth and diversification to help protect investors from doing the wrong thing at the wrong time during market downturns.”