CHICAGO – Are your clients diversified enough for the next major stock market crash?

It has been almost a decade since the financial crisis. While there have been various sell-offs and flash crashes that have tested the limits of client portfolios since, many industry leaders are considering the likelihood of a repeat and just how well-prepared the industry will be if — or when — that day comes.

There were a couple of key assets that could have helped clients during the financial crisis. "Mainly, elongated U.S. Treasurys," said Bob Boyda, co-head of global asset allocation at John Hancock Asset Management, at a panel focused on diversification at the Morningstar Investment Conference in Chicago. Did investors have enough of them? "Very likely not," he added.

Morningstar’s Dan McNeela hosted a panel on the future of diversification with John Hancock Asset Management’s Bob Boyda, Ann Lester of J.P. Morgan Asset Management and Brad Vogt of American Funds .
Morningstar’s Dan McNeela hosted a panel on the future of diversification with John Hancock Asset Management’s Bob Boyda, Ann Lester of J.P. Morgan Asset Management and Brad Vogt of American Funds. Jim Tweedie, Wyckoff-Tweedie Photography


There are signs, however, that lessons have been learned from the financial crisis, as advisors now have a deeper understanding of how client portfolios should be constructed said panelist Anne Lester, head of retirement solutions for J.P. Morgan Asset Management's global investment management solutions.

Now, the wealth management industry is generally better at measuring risk and understanding its “ripple effect” on various parts of a client’s portfolio, Lester explained.

“Even those portfolios that took it on the chin in 2008 — if you didn’t sell those bounced portfolios where diversification didn’t work, most of them rolled right back in ‘09 and ‘10. By 2011, you were OK,” Lester said. “If you held on to your cores, which admittedly is easier said than done, you would have seen that diversification works. It just didn’t work in a very narrow time frame.”

“Even those portfolios that took it on the chin in 2008 … most of them rolled right back in ‘09 and ’10,” said Anne Lester, head of retirement solutions for J.P. Morgan Asset Management's global investment management solutions.
“Even those portfolios that took it on the chin in 2008 … most of them rolled right back in ‘09 and ’10,” said J.P. Morgan's Anne Lester. Jim Tweedie, Wyckoff-Tweedie Photography

Today, with the threat of rising interest rates and various political risks at home and abroad, clients are rightfully nervous about the future of their retirement savings, said Index Industry Association CEO Rick Redding.

Those who started investing in the depths of the financial crisis did not come back to equities for some time, “which is usually the wrong thing to do,” he added.

“One of the things we’ve been pushing is getting advisors to dig one level down to understand the methodology that underlies a specific index or product,” Redding said.

Following the financial crisis, advisors have expanded their focus beyond the percentage of equities and bonds in a given portfolio. They are placing greater emphasis on the types of holdings that make up a client’s portfolio, says Brad Vogt, principal investment officer for American Funds’ target-date series.

“It’s easy to oversimplify portfolio construction to asset allocation based on simplistic metrics like stocks and bonds or U.S. versus non-U.S,” Vogt explains. “Take our target-date series for example. That has a portfolio for everybody from age 20 to 95. Most have a shape of their equity allocation that starts at all equities and goes down. Not only is the equity position is changing, the type equities are also changing.”

A sign that clients are embracing these changes is their willingness to adapt, said Judith Ward, senior financial planner at T. Rowe Price.

“As they head into retirement, we see a lot of retirees are flexible in their spending,” Ward said. “They are willing to tighten the belt rather than take an extreme loss.”

Ward noted that it is important to stress to the end investor that they have the final say over asset allocation.

“How much they are saving is key to their success,” Ward said. “We, as advisors, are helping clients understand what has happened in the past, how long might there be a bear market — at the worst like in 2008 — and what they have to do to get through that period.”

Andrew Shilling

Andrew Shilling

Andrew Shilling is an associate editor for Financial Planning, Bank Investment Consultant, On Wall Street and Money Management Executive. Follow him on Twitter at @AndrewWShilling.