byline: Leah Small

In mid-March, Stephan Cassaday was absorbing Florida sun rays while bicycling near his vacation home when a radio news update on pandemic-related market volatility caused him to pull to the side of the road. Seated on a park bench, Cassaday, chairman and CEO of McLean-based Cassaday & Co. Inc. wealth managers, rang his team in Virginia to ensure they were making adjustments to client portfolios to address the changing market.

A key response was advising frightened investors to not pull out of the market, Cassaday says. Instead, the firm urged clients to capitalize on low stock prices to “buy really good companies at discount prices.” As the pandemic continues to cripple many sectors of the American economy, wealth managers say it’s wise to view the downturn as an opportunity to invest in sectors, such as tech, that may have had higher share prices before the pandemic. During the 2008-09 Great Recession, Cassaday was wary of riskier buying during a downturn, but says he later regretted missing out on potentially higher returns.

Due to the pandemic, tech stocks have been “actually reasonably priced … so we made a big bet on that,” he says. “We had an incredible quarter … because we made this decision that it wasn’t the end of the world, even though markets were acting like it.”

Despite the large gains that can be made buying shares at reduced prices, Cassaday says, clients must offset risks with a diversified investment portfolio, including stocks, bonds, cash and “hard assets like real estate and precious metals.”

Diversification — reducing risk by allocating investments across multiple economic sectors and financial instruments — should be the key focus of portfolio building, Cassaday and other wealth managers say. It’s the chief strategy investors should consider to weather the recession and plan for future personal financial milestones, such as retirement. That’s important to keep in mind when taking gambles on trending financial sectors.

David Karp, co-founder of PagnatoKarp in Reston, says having a diversified portfolio allows investors to take advantage of opportunities that are high risk but could also yield high returns. “The market always affords us opportunities, and the way to compound capital and to avoid large losses is to play defense until it’s time to play offense,” Karp says. “And when it’s time to play offense, be aggressive.”

And while it could be tempting to aggressively overextend buying in exchange for even larger returns, Cassaday advises clients to “resign yourself to earning a modest return that’s consistent and reliable.”

Michael Joyce, president and founder of Richmond-based Agili, says diversification “mitigated the damage to [client] portfolios in those [first] six weeks,” of economic shutdowns caused by the pandemic. He adds that while the firm “saw opportunities almost everywhere we looked” due to low stock prices, investors should primarily maintain a wide range of asset types.

“This is not an environment to run scared from,” Joyce adds. “I also don’t think it’s an environment in which we can just throw money at the market.”

Investors whose assets are broadly allocated prior to recessions tend to be better shielded from losses, says Joseph Montgomery, managing director of investments at Wells Fargo Advisors in Williamsburg.

“Diversification has the advantage of bringing you into things that are the hot idea, but it always gives you the advantage of not being overexposed when something goes out of favor,” he says.

Joyce also cautions against purely following trends that “turn around quickly” in today’s market.

Mitigating losses during a recession with a well-diversified portfolio allows investors to keep the long view in mind; the decades leading to retirement and other financial goals, Montgomery adds. The biggest danger for investors is not short-term loss during a recession, but a portfolio that is too low-yield to fund retirement plans, he adds.

“Your biggest risk is longevity,” Montgomery says. “If you live to 100 and you only plan to 85, you’re in trouble.”

Cassaday agrees and says that fears of economic slowdowns are currently driving investor decisions at the expense of long-term portfolio objectives.

“People are worried about what happened in 2008, which is understandable, but what they really should worry about is what if I live to 108,” Cassaday says. “That’s the risk they should be paying attention to.”

Looking to the future

Adequately preparing for retirement requires a wider range of financial strategies under current market conditions than those of the last 20 years, a reality causing managers to question longtime practices. Investment portfolios composed of 60% stocks and 40% bonds had long been considered the best strategy for ensuring long-term growth. But a growing number of wealth managers view this portfolio as obsolete, due to a trend of decreasing bond yields, which could lower overall returns, especially during economic downturns. Last year, Morgan Stanley predicted that 60/40 portfolios would yield only a 2.8% annual return over the next 10 years, down from an average of about 6% over the past 20 years.

Instead of a 60/40 stocks and bonds portfolio, investors should diversify into more investment classes, such as hedge funds, to respond to changing market conditions, Montgomery says.

“Ten years ago, most people were playing the investment game with two or three clubs; now, they are broadening their mix,” he says.

Montgomery adds that recessions are “almost an opportunity” for investors to take a “thoughtful” look at portfolios and move away from overly aggressive strategies that may work only during boom times.

Wealth managers also caution investors to not panic and pull out of the market during recessions, a move that hurts long-term goals.

“More money is lost trying to avoid bear markets than in any bear market,” Cassaday says.

Over the last 20 years, the average return for individual investors has been roughly 1% to 2%, “barely above inflation” because investors quickly decide to sell assets when the market is down to avoid losses, Joyce says.

“It’s human nature to sell just because things are down, and you should really resist that temptation and focus on the long term,” he says.

Also, don’t put too much stock in presidential election outcomes when managing stocks and other assets, Joyce, says.

“Every presidential election year we get contacts that say,  ‘If a Democrat wins, I want to divest everything,’ or, ‘If a Republican wins, I want to divest everything,’” Joyce says. “In almost all cases, it doesn’t make a big difference [for the markets] who gets elected.”

Joyce adds that there are a couple of money moves investors can make during downturns that are beneficial in the long term, such as converting a portion of an IRA into a Roth IRA — the benefit being that investors can withdraw funds tax-free during retirement because income tax is paid up front on investments. Investors would save money on Roth conversions during a down market because they would pay taxes on a smaller investment portfolio.

Overall, preparing for the future by balancing aggressive asset acquisition with cautious diversification is the best way to weather a down economy.

Cassaday advises worried investors to remember that downturns are not permanent but adds they should be “mentally and emotionally prepared” for market fluctuations, the ends of which are indeterminate.

“No one anywhere has ever [accurately] predicted the onset, magnitude or duration of a decline,” Cassaday says. “It’s never happened, and we’ve studied this.”