Stock market corrections can prompt investors to impulse selling or other moves that are often harmful to their long-term financial well-being. By walking through four steps with a client, we can refocus his or her mindset on the fundamental issues that help safeguard financial stability and achieve steady outperformance.

During periods of market volatility, investors overly focused on shortterm gyrations in stock prices may fall prey to emotional swings that can ultimately prove more detrimental to their financial wellbeing than a bear market.

In advising clients over the years, we have seen the value of helping families buy into the longterm orientation essential to successful investing and portfolio management through all market conditions. Such a perspective is more than just a state of mind: it’s the benefit of taking deliberate, practical steps toward the sound decision making and management necessary to achieve clarity and instill confidence in any long-term plan. Here are four ways we think about preparing clients to stay the course regardless of the market’s mood:

Clarify your mission. We work with clients to create—either in writing or verbally—a “mission statement” detailing how they want their assets to serve their well-being in coming decades. This includes articulating a policy with regard to investment risk tolerance, long-term goals, cash flow needs and sector diversification. It also encompasses intended lifestyle, charitable giving, retirement and estate planning, and liabilities, including anticipated costs for health care. During times of market volatility, such long-term planning enables clients to shake off an impulse to sell.

Set hard numbers. Determine both your annual level of spending and a five- and 10-year goal for portfolio returns. This helps to meet your immediate needs and instill discipline in a longterm context, averting excessive spending when valuations are rising.

There are three fundamental variables to monitor in portfolio management: market performance, changes in tax policy and a portfolio’s rate of drawdown (expenses and spending). We cannot control the first two forces. But by helping a client determine the optimal rate for drawing from a portfolio, we can help preserve capital and ensure a successful long-term outcome.

Use the “Three Bucket” approach to ensure balance in a portfolio. We regularly review portfolio allocations to confirm that clients have sufficient “operating” funds to meet near-term cash needs. This allows a client to ride out a market correction without having to sell equities or any security at a disadvantageous time.

The operating allocation for annual living expenses is typically invested in money market instruments and short-duration, fixed income vehicles. It is just one of “three buckets” that help clients differentiate among the purposes of their investments, manage risk and achieve solid, long-term returns.

The “core” allocation is made up of a mix of assets aimed at stability and growth. It is not meant to be changed dramatically over time and is tailored to a client’s specific needs, including retirement, education and philanthropy.

With well-structured core and operating allocations, a client can comfortably go on the offensive with the third, “opportunistic” bucket. This focuses on tactical, timely investments and will vary depending on an investment’s risk level, liquidity and return potential. This allocation should yield a risk-adjusted return exceeding that of the core bucket.

Create a portfolio structure buffered against taxes. There are few pieces of news more exasperating for investors than a significant tax bill following a period of meager returns. Therefore, it is essential that we structure client portfolios to be tax efficient. After the 2008-2009 financial crisis, many clients could use loss carry-forwards to reduce taxes against gains taken in subsequent years. With those benefits used up, we are always looking for new and sometimes creative ways to manage tax liabilities.

By understanding and meeting the four criteria above, a client can set a windward anchor of realistic expectations. A family will then approach its portfolio—and any foul weather in financial markets—with confidence, increasing the likelihood of achieving its long-term goals.


Please download The Advisory to read other articles in this issue including:

Off the Beaten Trail
By Taylor Graff, CFA, Asset Allocation Analyst

Investors should expect the market swings of 2015 to carry over into the new year, driven largely by concerns over weak global growth. We are recommending that clients consider high-yield bonds and other asset classes that can offer the prospect of solid gains that diverge from the path of traditional stocks and bonds.

Diamonds In The Rough
By Tom Graff, CFA, Head of Fixed Income

Weak commodity prices and flagging emerging market economies have dimmed the outlook for energy and metals companies, and are shaking up the high-yield bond market. Through conservative, bottom-up analysis, we are taking advantage of current market dynamics to buy attractively priced debt in companies with solid revenues and limited vulnerability to an economic downturn.

Ensuring Legacies Last
By Joe Ferlise, Strategic Advisor

Heirs who are unprepared for an inheritance may find that a big windfall can quickly become a mixed blessing. An essential step in estate planning is making sure beneficiaries know all the responsibilities and challenges that accompany the management of increasing wealth.

The views expressed are those of the authors and Brown Advisory as of the date referenced and are subject to change at any time based on market or other conditions. These views are not intended to be a forecast of future events or a guarantee of future results. Past performance is not a guarantee of future performance. In addition, these views may not be relied upon as investment advice. The information provided in this material should not be considered a recommendation to buy or sell any of the securities mentioned. It should not be assumed that investments in such securities have been or will be profitable. To the extent specific securities are mentioned, they have been selected by the author on an objective basis to illustrate views expressed in the commentary and do not represent all of the securities purchased, sold or recommended for advisory clients or other clients. The information contained herein has been prepared from sources believed reliable but is not guaranteed by us as to its timeliness or accuracy, and is not a complete summary or statement of all available data. This piece is intended solely for our clients and prospective clients and is for informational purposes only. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication.

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