An advisor’s rational plan for irrational markets

An advisor’s rational plan for irrational markets

An advisor’s rational plan for irrational markets As markets continue to decline clients are increasingly throwing reason out the window and directing advisors to sell first and ask questions later.
 
Up until a few weeks ago the markets were considered extremely dull and lacking volatility but all that’s changed with the reversal of fortunes for China, its Shanghai exchange racking up double-digit losses in a week. Advisors who’ve been unprepared for the latest action are going to be facing some tough questions from clients.
 
With a bull market of almost seven years’ duration, it’s not surprising that a correction is upon us.
 
Advisors were already feeling the markets had gotten ahead of themselves before the Chinese markets hit the skids, with many moving their clients into a significant cash position and waiting patiently to pounce on buying opportunities emerging from the correction.
 
“It’s going to be quite a week,” said RBC Dominion Securities advisor Greg Hall. “I moved clients to 20-50% cash back in early July so we are in a good position. I also bought puts for option-eligible clients last week.”
 
So, what’s Hall doing to put that cash back into play?”
 
“We’re-balanced down to the weakest denominator. What I mean by that is, we re-calculated what a “balanced” amount would be per holding and then went to that…based on the losers. So all the profits and then some came off the table,” said Hall. “Nothing has changed with my opinion of any of the companies we own (including the losers) so we did not sell out of any positions completely. We end up with lots of cash and I will start to scale in over the next few months.”
 
While advisors such as Hall have prepared for this latest correction, it’s not a sure thing that there won’t be a lot more carnage before this latest downturn comes to an end because the China flu is spreading although most experts have yet to categorize it as a crisis.

“It's totally premature to speak of a crisis in China," said Carlo Cottarelli, an IMF executive director representing countries such as Italy and Greece on its board. "China's real economy is slowing but it's perfectly natural that this should happen ... What happened in recent days is a shock on financial markets.”

Whatever comes, advisors are preparing clients for the bumpy ride still ahead.