Why now is the perfect time to revisit clients' risk tolerance

Advisor says there might be a silver lining to volatility after flustered Fed 'shot its last bullet'

Why now is the perfect time to revisit clients' risk tolerance

The U.S. Federal reserve has “shot its last bullet” and only fuelled fears of a recession, according to a Toronto-based advisor.

Jason De Thomasis, of De Thomas Wealth Management, told WP the Fed’s emergency 0.5% rate cut on Tuesday was unexpected as it was announced before the next scheduled meeting.

However, he added that the move was too fast, too early and reeked of panic. All it did, he said, was show that the Fed is terrified of the economy slowing too much, which may in turn cause more panic.

He said: “But now what? If this doesn't work, will they be forced to make another move, and perhaps another? With deflation on the horizon, the Fed is hoping these cuts will reflate assets that drive inflation back up. The problem is they cannot stimulate economic demand or counteract the economic impact, which is still largely unknown, from the coronavirus.”

The impact of the Fed's move – and the subsequent 0.5% cut from the Bank of Canada – also gets to the heart of managing clients’ expectations. Recent stock market highs were becoming “detached from economic reality” and being fuelled more by speculation than fundamentals. De Thomasis believes some clients had become accustomed to a smooth ride but that this provides an opportunity to educate and remind them of worst-case scenarios, which are part and parcel of investing.

He added that a silver lining of this volatility and uncertainty is that it also forces people to reassess their tolerance for risk.

“If the recent volatility has them panicking, we take this as an opportunity to revisit their financial plan with a special focus on their investment objectives risk and tolerance - which may require us to adjust return expectations based on actual risk level.

“Investors were spoiled over the past few years with above average returns without realizing the risks involved – there is no such thing as a free lunch. If the expectation is higher equity-like returns, you need to take a fair amount of risk. Investors were far too overconfident with unreasonable expectations to huge short-term returns chasing the ‘next Tesla’ without any risk of loss.”

The full economic impact of the coronavirus is unknown but De Thomasis warned that the numbers could get ugly and that there will definitely be earnings downgrades and profit declines, potentially followed by increased jobless numbers.

The last time the Fed cut rates at this pace - in 2008-2009 - jobless claims shot up, while the same occurred in 2001. “We all know what followed in both scenarios,” he said. “I didn’t want to see a rate cut – at least not at this stage. This move only signals the growing concern of a recession. Further, the cuts will not cure coronavirus or get people back to booking vacations, going out to large social events or get companies rescheduling employee travel or annual meetings.”

Despite the anxiety-inducing week, De Thomas Wealth Management remains confident in its approach. Rather than timing the market, it focuses on diversification and asset allocation. This has cushioned the blow for higher-risk portfolios while more conservative clients are “sitting in a good position”.

De Thomasis said: “As client portfolios grow and evolve, we look at strategies and various asset classes to include in a portfolio to complement each other. We adhere to this investment philosophy regardless of market conditions. Time and time again, 'Mr Market' has proven the smartest people wrong and does so on a dime. How many economists or investors were predicting a new virus to emerge in 2020 that would shake the markets? 

“These also mean that when momentum, tech etc. are providing out-sized returns and a diversified portfolio is slightly lagging, our clients are happy to participate but are not taking on huge risks by chasing returns.”