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Portfolio Perspectives

Use our interactive timeline to explore how your portfolio decisions would have needed to change through the years. How would your choices have measured up against the different scenarios of the past?

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Contagion Risks

Global Financial Crisis | October 2007 - March 2009

The global financial crisis wreaked havoc with the portfolios of many wealth management clients, particularly those with financial advisors who thought they were properly diversified.

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Which portfolio would have been ideal to have during the Global Financial Crisis? Select different portfolio options to find out.

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S&P 500 J.P. Morgan 60/40 Benchmark Your Selection

Select a Portfolio

MSCI EAFE NR USD 5.00%

Russell 1000 Value TR USD 5.00%

Russell 1000 Growth TR USD 5.00%

Russell 2500 TR USD 3.00%

MSCI EM NR USD 2.50%

BBgBarc US Agg Bond TR USD 61.25%

BBgBarc US HY 2% Issuer Cap TR USD 10.50%

JPM EMBI Global Diversified TR USD 6.75%

MSCI US REIT NR USD 1.00%

MSCI EAFE NR USD 10.00%

Russell 1000 Value TR USD 9.88%

Russell 1000 Growth TR USD 9.87%

Russell 2500 TR USD 5.25%

MSCI EM NR USD 4.50%

BBgBarc US Agg Bond TR USD 45.25%

BBgBarc US HY 2% Issuer Cap TR USD 8.00%

JPM EMBI Global Diversified TR USD 5.25%

MSCI US REIT NR USD 2.00%

MSCI EAFE NR USD 20.00%

Russell 1000 Value TR USD 19.25%

Russell 1000 Growth TR USD 19.25%

Russell 2500 TR USD 10.50%

MSCI EM NR USD 9.00%

BBgBarc US Agg Bond TR USD 9.50%

BBgBarc US HY 2% Issuer Cap TR USD 4.50%

JPM EMBI Global Diversified TR USD 3.00%

MSCI US REIT NR USD 5.00%

Shown for illustrative purposes. Past performance is no guarantee of future results. Data source: Morningstar, Inc., All Rights Reserved. The information contained herein: (1) is proprietary to J.P. Morgan Asset Management and Morningstar; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information.

2007 2009

How Advisors Identify and Diversify Away from Hidden Contagion Risks

The global financial crisis wreaked havoc on investors’ portfolios, including those of wealth management clients who thought their financial advisors had them properly diversified. In truth, when the S&P 500 plummeted 54.89% between October 2007 and March 2009, those investors learned the various asset classes across their portfolios were far more correlated than was otherwise thought. As a result, hidden contagion made the clients of seemingly savvy financial advisors far more vulnerable than they expected.

Advisors who successfully weathered the storm say identifying and diversifying away from contagion risks in the future is possible – at least for those who know where to look. Spotting correlations among sectors, asset classes or countries is a good first step. Tracking major outflows and consistent flights to safe haven assets is another useful measure. But the real key is being able to identify potential triggers by making connections between seemingly distinct markets.

“Looking at the 2008 correlation and contagion, the lesson for advisors is to not conflate diversification and risk management,” says Greg Luken, a former financial advisor who runs Luken Investment Analytics, a Nashville, Tenn.-based quantitative outsourced CIO firm serving advisors. “Know the maximum acceptable loss in the portfolio, and in each respective investment in the portfolio, as well as conditions when you will exit the position.”

He warns that waiting until you’re in the midst of a crisis or potential crisis is the wrong time to start. Instead, Luken suggests, advisors should begin with the end in mind. Earlier this year, wary of how rising interest rates are affecting bonds, his firm started proactively de-risking portfolios for advisors by increasing positions in short-term and floating-rate fixed income.

Luken also notes that while no signs of global contagion are imminent, he does point to potential debt restructuring problems in Greece and Italy as having the potential to spark a contagion event in the Eurozone that could one day affect U.S. advisory portfolios.

Cash as an asset class — for liquidity, safety and opportunistic purposes — was a lesson many advisors learned during the crash.

Adam Taback, head of global alternative investments, Wells Fargo Investment Institute

Adam Taback, a one-time financial advisor and global head of alternative investments for the Wells Fargo Investment Institute, says although diversification should be achieved through uncorrelated asset classes, he encourages advisors to consider their clients’ liquidity needs when trying to diversify away contagion risks.

“Cash as an asset class — for liquidity, safety and opportunistic purposes — was a lesson many advisors learned during the crash,” he says, recalling how in 2008 cash was one of the only asset classes to avoid losses and that advisors who had already given client portfolios enough exposure to it were able to reallocate at significant bargains.

On the other hand, Taback says, advisors discovered that a lack of liquidity from alternatives such as hedge funds benefited certain clients. “By keeping investors from redeeming quickly out of fear, managers could keep the capital and gain returns, since the next calendar year, markets saw a big snap back up in 2009.”

If a new contagion on the magnitude of the 2008 crisis does strike, advisors should think twice about running to treasuries, according to Michael Poppo, a New York-based financial advisor who manages over $1.3 billion at UBS.

During the financial crisis, the MSCI EAFE fell more than 50% before rebounding by more than 70% in the following year. The massive outflow from foreign markets, coupled with the massive inflows into U.S. Treasuries, left the U.S. government benchmark Treasury with an effective yield of 0%.

“Selling out after a historically significant correction is rarely a good idea and, in this analysis, would have resulted in leaving the MSCI EAFE — yielding 5% — to purchase an overvalued, effectively non-yielding investment,” Poppo says.

Policy and Politics

U.S. Downgrade | April 2011 - October 2011

When credit rating agency Standard & Poor’s stripped the United States of its AAA status in August 2011, investors turned to their advisors for explanations about how the downgrade would affect their investments.

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Which portfolio would have been ideal to have during the U.S. Downgrade? Select different portfolio options to find out.

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S&P 500 J.P. Morgan 60/40 Benchmark Your Selection

Select a Portfolio

MSCI EAFE NR USD 5.00%

Russell 1000 Value TR USD 5.00%

Russell 1000 Growth TR USD 5.00%

Russell 2500 TR USD 3.00%

MSCI EM NR USD 2.50%

BBgBarc US Agg Bond TR USD 61.25%

BBgBarc US HY 2% Issuer Cap TR USD 10.50%

JPM EMBI Global Diversified TR USD 6.75%

MSCI US REIT NR USD 1.00%

MSCI EAFE NR USD 10.00%

Russell 1000 Value TR USD 9.88%

Russell 1000 Growth TR USD 9.87%

Russell 2500 TR USD 5.25%

MSCI EM NR USD 4.50%

BBgBarc US Agg Bond TR USD 45.25%

BBgBarc US HY 2% Issuer Cap TR USD 8.00%

JPM EMBI Global Diversified TR USD 5.25%

MSCI US REIT NR USD 2.00%

MSCI EAFE NR USD 20.00%

Russell 1000 Value TR USD 19.25%

Russell 1000 Growth TR USD 19.25%

Russell 2500 TR USD 10.50%

MSCI EM NR USD 9.00%

BBgBarc US Agg Bond TR USD 9.50%

BBgBarc US HY 2% Issuer Cap TR USD 4.50%

JPM EMBI Global Diversified TR USD 3.00%

MSCI US REIT NR USD 5.00%

Shown for illustrative purposes. Past performance is no guarantee of future results. Data source: Morningstar, Inc., All Rights Reserved. The information contained herein: (1) is proprietary to J.P. Morgan Asset Management and Morningstar; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information.

2011

Talking to Clients About Risks from Government Policy and Politics

When credit rating agency Standard & Poor’s stripped the United States of its AAA status in August 2011, investors turned to their advisors for explanations about how the downgrade would affect their investments.

The situation stemmed from a combination of partisan disagreement and brinkmanship by U.S. lawmakers fighting over the debt ceiling. According to S&P, the fiscal consolidation plan to which Congress and the Obama administration agreed had not sufficiently stabilized the government’s mid-term debt situation, while political infighting had led to a worrisome lack of predictability and effectiveness.

The resulting AA+ credit rating set markets on edge and investors into a panic. However, this situation is only one example of government-related risks that advisors must be able to discuss with their clients. Indeed, market participants have long been vexed by political turmoil.

Other examples include the tariffs George W. Bush imposed on imported steel from March 2002 to December 2003, as well as recent U.S. tariff friction between the Trump administration and other major economies.

Since both government debt and trade can influence national economies, advisors also should take central banks into consideration when talking to clients about political and policy risks.

Rick Kent, head of Merit Financial Advisors in Alpharetta, Ga., an FT 300 Top RIA, discussed the 2011 AAA downgrade with clients. “I told them that although it was not a favorable outcome, a downgrade to AA+ also was not enough of a movement to frighten most bond managers because if that had happened to virtually any other bond than U.S. government debt, there would be much less concern,” he says.

He insists that when a big government policy issue occurs, like a credit downgrade or tariff battles, advisors should be proactive and not reactive. “Help clients understand what it really means by bringing unbiased clarity to the noise they get from talking heads on TV.”

Phil Blancato, President and Chief Executive Officer of Ladenburg Thalmann Asset Management (LTAM), a New York-based firm that manages over $2 billion, says there are times when it makes sense to adjust client portfolios based on policy headwinds.

When evidence arose that the Bush-era steel tariffs were becoming a major political event likely to bring turmoil to stocks, advisors had an opportunity to shift clients out of equities and into fixed income.

Phil Blancato, president and CEO of Ladenburg Thalmann Asset Management

He says LTAM added U.S. Treasuries to client portfolios in 2008, when the Federal Reserve began taking unprecedented action to maintain market liquidity as the lender of last resort to U.S. banks, with actions including dropping the federal funds target rate from 4.25% to near zero. By holding more Treasuries through late 2009, Blancato says, the firm’s clients saw a flight to quality that generated a positive return for fixed income mitigating the significant drawdown in equites, since active management helps reduce equity risk and reduce downside losses.

Blancato also recalls 2002 as a time for policy-inspired changes to client portfolios.

“When evidence arose that the Bush-era steel tariffs were becoming a major political event likely to bring turmoil to stocks, advisors had an opportunity to shift clients out of equities and into fixed income,” Blancato says. “Successful advisors kept clients more heavily positioned in fixed income than equities throughout the next 12 months, while re-evaluating every quarter based on how the market was responding to the tariffs — which eventually were opposed by the World Trade Organization.”

The S&P 500 plummeted 26.32% during the year following the onset of the steel tariffs, which began less than four months after the U.S. had emerged from the 2001 recession. The Barclays U.S. Aggregate Bond Index, meanwhile, rose 10.7% during that time.

Yet leaving clients overweight fixed income throughout 2003 would have limited their upside when equities rebounded, Blancato says. He notes that nimble advisors who reallocated to stocks in early 2003 helped clients gain from the S&P 500’s 43% rise that calendar year.

Steve Kaplan, head of Portfolio Insights for J.P. Morgan Asset Management, says many U.S. portfolios were already underweight international holdings at the start of the year due to home country bias. He explains the 2018 tariff battle gave U.S. securities an unexpected advantage over international holdings, so portfolios became even further underweight international as the year progressed. Still, Kaplan says international securities have strong potential to outperform the U.S. once again over the next 10 to 15 years, which advisors should keep in mind when allocating for client portfolios.

Kent, of Merit Financial, suggests that when recent U.S. tariff skirmishes with China, Canada, and Europe hit the headlines, advisors should have pointed out to clients that President Trump repeatedly indicated an ultimate goal of reasonable long-term trade policies rather than trying to derail the global economy.

Alan Rechtschaffen, a New York-based financial advisor for UBS who also teaches at New York University’s School of Law, says complex macroeconomic decisions can have an extraordinary impact on the markets and market sentiment. He argues that as the Federal Reserve began shifting domestic monetary policy from a reactive phase to a path of normalization, fiscal headlines encouraged volatility in America and abroad.

“It is vital for financial professionals to advise their clients to remain cautiously disciplined, while maintaining a portfolio that can withstand market shocks”, Rechtschaffen says. “Strategies can change, prudent principles do not.”

Fear and the Market

Taper Tantrum | May 2013 - September 2013

Quite a few clients were caught off-guard by the “taper tantrum” of 2013 – a stark reminder for financial advisors that fear can grip markets at any time.

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Which portfolio would have been ideal to have during the Taper Tantrum? Select different portfolio options to find out.

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S&P 500 J.P. Morgan 60/40 Benchmark Your Selection

Select a Portfolio

MSCI EAFE NR USD 5.00%

Russell 1000 Value TR USD 5.00%

Russell 1000 Growth TR USD 5.00%

Russell 2500 TR USD 3.00%

MSCI EM NR USD 2.50%

BBgBarc US Agg Bond TR USD 61.25%

BBgBarc US HY 2% Issuer Cap TR USD 10.50%

JPM EMBI Global Diversified TR USD 6.75%

MSCI US REIT NR USD 1.00%

MSCI EAFE NR USD 10.00%

Russell 1000 Value TR USD 9.88%

Russell 1000 Growth TR USD 9.87%

Russell 2500 TR USD 5.25%

MSCI EM NR USD 4.50%

BBgBarc US Agg Bond TR USD 45.25%

BBgBarc US HY 2% Issuer Cap TR USD 8.00%

JPM EMBI Global Diversified TR USD 5.25%

MSCI US REIT NR USD 2.00%

MSCI EAFE NR USD 20.00%

Russell 1000 Value TR USD 19.25%

Russell 1000 Growth TR USD 19.25%

Russell 2500 TR USD 10.50%

MSCI EM NR USD 9.00%

BBgBarc US Agg Bond TR USD 9.50%

BBgBarc US HY 2% Issuer Cap TR USD 4.50%

JPM EMBI Global Diversified TR USD 3.00%

MSCI US REIT NR USD 5.00%

Shown for illustrative purposes. Past performance is no guarantee of future results. Data source: Morningstar, Inc., All Rights Reserved. The information contained herein: (1) is proprietary to J.P. Morgan Asset Management and Morningstar; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information.

2013

Navigating Headline Risk so Clients Stay the Course Instead of Panicking

Quite a few clients were caught off-guard by the “taper tantrum” of 2013 – a stark reminder for financial advisors that fear can grip markets at any time.

A mere statement by Federal Reserve officials that it would soon slow the pace of its massive quantitative easing program spawned fears an economic recovery would derail. Between May 3 and Sept. 5, 2013, yields on 10-year Treasuries rose from 1.86% to 2.45% while U.S. bond fund sales turned negative and U.S. equity fund sales fell by more than half.

During that time, some clients needed reassurance to stay the course with their financial plans instead of overreacting to ominous headlines.

Advisors say one solution in those instances is to explain to clients that planned policy events, like tapering quantitative easing, are likely to come with short-term but reversible negative reactions. It’s also wise to remind clients, as the downturn hits, that their own long-term financial plan still applies. Meanwhile smart advisors will look for new buying opportunities for their clients when assets are cheap, they say.

The underlying issue, some advisors caution, is complacency. Investors become comfortable and fail to respect the risks associated with their investments.

“Going into the taper tantrum, investors were much too complacent about risks to the bond market, because many of them had forgotten that bonds can go down,” explains Erik Davidson, chief investment officer for Wells Fargo Private Bank.

Davidson points out clients do not explicitly state when they are becoming complacent, suggesting that advisors should discuss risks to seemingly safe investments.

“Advisors need to have these talks during good times, like now, about not if a bear market comes, but about when a bear market comes. Describe what that looks like and feels like for the client.”

Davidson sees potential risks in tech stocks, which have been carrying much of the equity market, and in small-cap stocks, which have been viewed as a safe harbor from trade-war rhetoric but have valuation risk due to relatively high prices.

We called clients during the tantrum to tell them that this was an opportunity to put more of their money to work.

Kyle Brownlee, CEO, Wymer Brownlee Wealth Strategies

Steve Kaplan, head of Portfolio Insights for J.P. Morgan Asset Management, says that advisors need the emotional intelligence to differentiate between what clients tell advisors they are considering and what clients would actually do under panic-inducing but somewhat expected situations like the tapering of quantitative easing.

Advisors can inform their “client EQ” by learning each client’s investment time horizon and risk tolerance, while also keeping track of trailing returns over standard timeframes for the client’s portfolio compared to their portfolio benchmark, he says, because those actions can give a sense of the client’s comfort level with future market events.

“From a planning perspective, time horizon and risk tolerance become very important,” Kaplan says. “Very often when the industry or advisors look at performance they look at trailing returns over a standard timeframe.

Kyle Brownlee, a registered representative of HD Vest who runs Wymer Brownlee Wealth Strategies in Oklahoma, discusses volatility as an opportunity for clients to acquire desirable stocks and bonds. “If our end goal is to collect shares of investments where we have confidence, then we are looking to get into the market,” he says. “We called clients during the tantrum to tell them that this was an opportunity to put more of their money to work.”

Brownlee suggests that, during volatility caused by planned policy events, advisors should seek investments that are otherwise fundamentally strong. If a company’s leadership and overall business strategy remain intact despite the upheaval, for instance, that firm’s stock might stand a good chance of weathering the storm.

The caveat, Brownlee points out, is that clients must be reminded that, in these scenarios, achieving gains could take several months to well over a year. That’s why his team tells clients to pay attention to their holistic financial plan — including savings, 401(k), Social Security, and their residential property — instead of obsessing over a short-term drop in a particular security that has strong potential to excel down the line.

Mike Tiedemann, CEO and CIO of Tiedemann Advisors, an FT 300 Top RIA, says his firm’s approach is to own high quality and generally stable investments, across all asset classes, so his team can focus client communications on relevant fundamental data and the compounding nature of those assets over time.

“We have periodically utilized portfolio insurance in the form of equity and credit protection, to insulate against any outsized downside events,” says Tiedemann, whose New York-based firm has $18 billion in assets under advisement and offices in several states. “Now would be one of the times in history when the cost of protection remains quite cheap relative to what it provides.”

He says this can calm clients during market volatility and allows for conversations about investment opportunities. “This enables us to be offensive in mindset as opposed to defensive during less certain times.”

When to Reallocate

Global Slowdown Fear | July 2015 - August 2015

China’s soaring stock market crashed in June 2015. Two months later the country followed up with disappointing economic data. The reverberations of these two events were felt worldwide, shaking U.S. stocks and factory orders.

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Which portfolio would have been ideal to have during the Global Slowdown Fear? Select different portfolio options to find out.

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S&P 500 J.P. Morgan 60/40 Benchmark Your Selection

Select a Portfolio

MSCI EAFE NR USD 5.00%

Russell 1000 Value TR USD 5.00%

Russell 1000 Growth TR USD 5.00%

Russell 2500 TR USD 3.00%

MSCI EM NR USD 2.50%

BBgBarc US Agg Bond TR USD 61.25%

BBgBarc US HY 2% Issuer Cap TR USD 10.50%

JPM EMBI Global Diversified TR USD 6.75%

MSCI US REIT NR USD 1.00%

MSCI EAFE NR USD 10.00%

Russell 1000 Value TR USD 9.88%

Russell 1000 Growth TR USD 9.87%

Russell 2500 TR USD 5.25%

MSCI EM NR USD 4.50%

BBgBarc US Agg Bond TR USD 45.25%

BBgBarc US HY 2% Issuer Cap TR USD 8.00%

JPM EMBI Global Diversified TR USD 5.25%

MSCI US REIT NR USD 2.00%

MSCI EAFE NR USD 20.00%

Russell 1000 Value TR USD 19.25%

Russell 1000 Growth TR USD 19.25%

Russell 2500 TR USD 10.50%

MSCI EM NR USD 9.00%

BBgBarc US Agg Bond TR USD 9.50%

BBgBarc US HY 2% Issuer Cap TR USD 4.50%

JPM EMBI Global Diversified TR USD 3.00%

MSCI US REIT NR USD 5.00%

Shown for illustrative purposes. Past performance is no guarantee of future results. Data source: Morningstar, Inc., All Rights Reserved. The information contained herein: (1) is proprietary to J.P. Morgan Asset Management and Morningstar; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information.

2015

Shedding Sentimentality and Knowing When to Reallocate

China’s soaring stock market crashed in June 2015. Two months later the country followed up with disappointing economic data. The reverberations of these two events were felt worldwide, shaking U.S. stocks and factory orders. Between June 23 and August 25 of 2015, the S&P 500 fell 12%.

While many were caught flat-footed, the warning signs were there to be seen for those looking in the right place. Investors count on their financial advisors to be that proverbial canary in the coal mine.

From a macro perspective, warning signs include soaring debt that a government acknowledges as worrisome; poor economic indicators such as weak manufacturing, sales or labor figures; securities prices plunging due to these factors.

“Financial advisors need to remind clients not to get emotional about their money,” says Phil Blancato, New York-based Ladenburg Thalmann Asset Management’s chief executive. “It’s the number one mistake every investor makes, whether professional managers or retail clients. Your money doesn’t love you and you should not love it in a way that compromises your portfolio.”

With this philosophy in mind, his team searches for opportunities to reallocate ahead of rough waters, even when it requires addressing clients’ sentimental attachment to long-held investments. Blancato says if such conditions arose, he might point to runaway inflation and rapidly rising rates as signs of such rough waters for skeptical clients.

Steve Kaplan, head of portfolio insights for J.P. Morgan Asset Management, says advisors can back up these client conversations with hard data that make concentration risk and market-exposure risk very apparent. For example, if 35% of a client’s portfolio is stock in one U.S. company, that shows a major bias to the U.S. and likely a specific sector.

When is the right time to reallocate, and once those events do or do not transpire, when is the right time to reposition again?

Peter Murphy, chief investment officer, Founders Financial

For some clients, the difficult part is accepting it’s time to make a change on a previously successful investment.

Peter Murphy, chief investment officer of Maryland RIA and independent broker-dealer Founders Financial, warns that advisors must be cautious in such situations. “Any time you’re having a conversation with a client about reallocating in response to risk events, you introduce an element of timing,” he says. “That raises several potential issues. When is the right time to reallocate, and once those events do or do not transpire, when is the right time to reposition again?”

This is why advisors typically advocate staying the course, says Murphy. However, he acknowledges, economic imbalances in a major economy such as China or the U.S., which have historically triggered significant equity market declines, may warrant stronger consideration for reallocation.

Rick Kent, head of Merit Financial Advisors in Alpharetta, Ga., an FT 300 Top RIA, recalls saving a client from a similar situation in the lead-up to the 2008 financial crisis.

His client and the client’s brother had each received $1 million in bank stock from their deceased mother. Kent advised his client that such a strong concentration in a single company was risky in general, but especially during that economic climate. His client diversified, but the client’s brother did not and subsequently saw the stock lose half its value during the 2008 crash.

“I often share that story with clients who seem sentimental about a certain investment,” Kent says. “No matter how well a stock performs for some period of time, that success does not last forever. Some people are inclined to hold a stock just because their coworker or family members are holding it, too. I explain how that’s not an investment strategy. That’s luck.”

Erik Davidson, Wells Fargo Private Bank’s chief investment officer, says advisors may have to overcome a client’s belief that since a certain stock is closely linked to the source of the family’s wealth, selling it — even partially — is unthinkable.

That’s when advisors should acknowledge the client’s sentimental attachment, and then remind the client that lowering concentration risk is not an all-or-nothing proposition, he says. For instance, if a client has 25% of the portfolio in a single domestic technology or financial stock, or even in a China-specific fund, first persuade the client to reduce to 20%, and a bit later on try persuading the client to reduce to 15%, according to Davidson.

“People change incrementally,” he says. “It’s sort of like running a marathon. Think of it as going one mile at a time instead of the entire 26.2 miles.”

Headline Events

Pre/Post 2016 Election | July 2016 - December 2016

The United States presidential election of 2016 was the 58th quadrennial American presidential election, held on Tuesday, November 8, 2016. Trump took office as the 45th President on January 20, 2017. What were the portfolio implications during the previous presidential election?

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Test a portfolio

Which portfolio would have been ideal to have during the Pre/Post 2016 Election? Select different portfolio options to find out.

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S&P 500 J.P. Morgan 60/40 Benchmark Your Selection

Select a Portfolio

MSCI EAFE NR USD 5.00%

Russell 1000 Value TR USD 5.00%

Russell 1000 Growth TR USD 5.00%

Russell 2500 TR USD 3.00%

MSCI EM NR USD 2.50%

BBgBarc US Agg Bond TR USD 61.25%

BBgBarc US HY 2% Issuer Cap TR USD 10.50%

JPM EMBI Global Diversified TR USD 6.75%

MSCI US REIT NR USD 1.00%

MSCI EAFE NR USD 10.00%

Russell 1000 Value TR USD 9.88%

Russell 1000 Growth TR USD 9.87%

Russell 2500 TR USD 5.25%

MSCI EM NR USD 4.50%

BBgBarc US Agg Bond TR USD 45.25%

BBgBarc US HY 2% Issuer Cap TR USD 8.00%

JPM EMBI Global Diversified TR USD 5.25%

MSCI US REIT NR USD 2.00%

MSCI EAFE NR USD 20.00%

Russell 1000 Value TR USD 19.25%

Russell 1000 Growth TR USD 19.25%

Russell 2500 TR USD 10.50%

MSCI EM NR USD 9.00%

BBgBarc US Agg Bond TR USD 9.50%

BBgBarc US HY 2% Issuer Cap TR USD 4.50%

JPM EMBI Global Diversified TR USD 3.00%

MSCI US REIT NR USD 5.00%

Shown for illustrative purposes. Past performance is no guarantee of future results. Data source: Morningstar, Inc., All Rights Reserved. The information contained herein: (1) is proprietary to J.P. Morgan Asset Management and Morningstar; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information.

2016

The Advisor’s Approach to Active Management for Headline Events

Donald Trump’s surprise victory in the 2016 U.S. presidential election showcases why advisors need to warn clients against trying to time the markets.

Not only did most political commentators expect him to lose by a substantial margin, a considerable number of market watchers assumed stocks would plummet if he did win. Although those political commentators were proven wrong, markets did swoon for a brief period before climbing upward in embrace of Trump’s economic policies.

The market climb also coincided with U.S. Treasury rates beginning to rise immediately after the election. Ten-year Treasuries rose from 1.88% on Nov. 8 to 2.60% on Dec. 15, 2016, before dropping to 2.45% by the end of the year.

While many advisors frequently stress staying the course with their clients, there are times when a bit of portfolio maneuvering can help. Sometimes disruptive events are marked on the calendar years in advance.

“The presidential election was the kind of situation where advisors using a proactive approach could have protected concerned clients by imposing trade limit orders on losses, options strategies to cover positions in case of a market sell off, or even short-term ETFs with an inverse relationship to the S&P 500,” says Alex Chalekian, CEO of Lake Avenue Financial, an RIA in Pasadena, Calif., that manages over $150 million.

Chalekian says while he does not indulge in market-timing, there’s a middle ground between doing nothing in the face of a major scheduled headline event and abandoning rational investment strategies. “Advisors who took the knee-jerk approach in hopes of avoiding a crash, by selling off large holdings for clients before the election only to find themselves buying back in at higher levels, shot themselves in the foot.”

Steve Kaplan, head of portfolio insights for J.P. Morgan Asset Management, says that the intensity of the news flow on issues such as trade rhetoric and election battles makes it both impossible and unwise for advisors to react to everything.

“While advisors feel they may need to do something, portfolios should have a strategic long-term view based upon their risk profile and goals and make tactical shifts on the margins versus significant changes,” he says.

Advisors who abide a fiduciary responsibility would do well to apply behavioral finance and a “know your client” investment approach when managing clients through disruptive events, according to Kevin Scanlon, director of the Private Client Group at Stephens Inc., a diversified financial services firm based in Little Rock, Ark.

His advisors are more likely to “hedge” the portfolios of clients with a low tolerance for market swings, or a short-term investment horizon and need for cash. This may involve adjusting a client’s portfolio from a mix of 75-80% equities and 20-25% fixed income to a more conservative asset allocation of 60% equities and 40% fixed income.

There are clear benefits to staying in the market as opposed to attempting to time when to invest or pull out.

Kevin Scanlon, director, private client group, Stephens

“For clients with a high risk tolerance, significant resources, or an extended investment timeframe, we may recommend a ‘stay the course’ approach, rather than limiting upside or withdrawing from the market and related investments to protect the portfolio,” Scanlon says. “There are clear benefits to staying in the market as opposed to attempting to time when to invest or pull out.”

Brad Bernstein, a Philadelphia-based financial advisor at UBS, insists on always staying true to an investment strategy instead of trying to position clients for short-term events. Even so, he employs both strategic and tactical components to wealth management. The strategic component reflects a client’s risk tolerance, time horizon and cash flow needs. The tactical component responds to the day-to-day impact of economic, political, financial and tax considerations.

“It is important to have enough cash on hand to not have to touch one’s long-term and lifestyle portfolios during short-term market volatility,” Bernstein says. “However, after a significant move in the markets and at least once a year, we believe in rebalancing our portfolios to take advantage of the opportunities. This forces our clients to buy low and sell high and reduces risk.”

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