Updated Tuesday, July 29, 2014 as of 1:00 PM ET
Do Your Clients Need an Exit Strategy?
Friday, November 15, 2013
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In the 2008 crash and its aftermath, $2 trillion of Americans’ retirement savings were wiped out in just 15 months, according to the Congressional Budget Office.

The market recovered, of course -- but for clients nearing or in retirement, a market downturn may be something they simply can’t afford to endure. Without enough time to make up for the damage to their portfolios, they won’t be able to fund the retirement lifestyle they had envisioned.

“For clients within five years of retirement -- five years before or five years into retirement -- taking a big loss in a bear market can completely change their lives,” says Ken Moraif, president of Money Matters, a wealth management and investment firm in Plano, Texas.

That’s why he uses a clearly defined exit strategy to get his clients out of the markets before they lose too much.  

Moraif’s firm specializes in retirement planning and adheres to what he calls a “buy, hold and sell” investment philosophy. While many advisors are proponents of “buy and hold,” Moraif says that for his middle-class clients, the majority of which are within five years of retiring, the top priority is simply not losing money. “Risk management and asset protection are the most important to them,” he adds.   

3 PORTFOLIO ENEMIES

For these clients, Moraif says, there are three portfolio enemies that financial plans should address: inflation, taxes, and bear markets.

“Historically, the stock market is one of the best inflation fighting vehicles we have available,” Moraif says. “The important thing, of course, is to only have as much stock market in the client's portfolio as is necessary to accomplish their financial goals.”

Taxes also play a big part in the decision-making process. Moraif says his team tries to draw down taxable accounts first, as they are generally taxed lower, and retirement plans later, since they are taxed at the highest rate.

But the most significant threat to near-retiree client portfolios, Moraif contends, is bear markets. “We believe it is incumbent upon us as financial advisors to do all that we can to protect our clients from catastrophic losses,” he says.

Because bear markets are generally precipitated by a recession, Moraif argues, his firm uses key (and, he says, proprietary) indicators to determine when to get clients out. “The decision as to when we are going to sell is a proprietary process that essentially is a trailing stop loss on the stock market,” he says. “Our proprietary buy, hold and sell strategy triggered a sell in November 2007 and did not trigger a buy until June 2009. Our clients who were out of the stock market did not suffer the losses that the market dealt during that period.”

But even for advisors who don’t ascribe to the buy, hold and sell philosophy, Moraif says, “Having an exit discipline requires a change of philosophy. The advisor needs to first accept that buy hold and sell is better than just buy and hold.”

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(3) Comments
Of course - their proprietary market timing process will save you! You'll get out at the top and back in at the bottom! They guessed correctly once (assuming this is accurate) and I'm sure have been marketing the hell out of their "proprietary process" since. Sadly, they are probably taking business away from respectable advisors that present realistic expectations to their clients.
Posted by Bradley B | Thursday, November 21 2013 at 4:01PM ET
I feel sorry for Bradley B as he is obviously stuck in the proverbial "Dark Ages" and thinks that a Buy & Hold Strategy is a good idea - you know, the one from "Modern Portfolio Theory" - the one developed by the sage Harry Markowitz et al during the 1950's when anything new or inventive was called "Modern" :-) If that is what a "respectable advisor" does to their clients (def. one who is under the protection of another) much less their customers (def. one who buys a product or service from another)God help their clients!!! By the way, simply going to cash and holding is a flawed strategy as well witness the return on Intermediate U.S. Treasury Notes which were up over 13.00% between Nov 2007 and June 2009. If one actually utilized a Long/Short Bond Strategy the potential return was over 50.00% positive during the same time frame!!! If asset allocation and diversification of a portfolio is truly to utilize ALL available asset classes, why not purchase these same U.S Treasury Notes instead of going to cash and holding court??? Just sayin'.........
Posted by MICHAEL M | Monday, November 25 2013 at 7:44PM ET
Settle down Michael M. - you have no idea what my process is. To be clear, I am not advocating for buy hold and forget. Just pointing out that there will never be a perfect system that is going to give you all of the upside of the market and remove most of the downside. If you believe you have this system, you are not only fooling your clients, you are fooling yourself. I actually agree with having long/short investments (and/or other non-correlated investments)in a portfolio - they can be great diversifiers. Best of luck.
Posted by Bradley B | Tuesday, November 26 2013 at 8:30PM ET
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