Investing In Uncertain Times – Coronavirus Volatility And Your Portfolio

“It’s only when the tide goes out that you learn who has been swimming naked.” ~ Warren Buffett

Unfortunately, many retail investors have been swimming naked in the markets, but they never peeked below the surface before to find out if they were wearing anything below their waist.  The market turbulence over the last couple of months has been tough to stomach, especially fixed-income retirees and those approaching retirement

Some investors – including those individuals who thought that their portfolios were “conservative” - may have seen their portfolios drop by over 30%. And then come back up. And then go back down. Suffice it to say, the market volatility is far from over. If you are an investor in the stock or bond market, you are at risk.  And you are at greater risk if your portfolio is invested or over-concentrated in high-risk securities or a single sector of the market.

The level of uncertainty created by COVID-19 is unprecedented. We do not know when the COVID-19 restrictions will be lifted and economies re-opened. And we have no idea what our “new normal” will be. So what should you do now? In one word: evaluate. 

The best thing you can do today as an investor is to review your portfolio and meet with your financial advisor if you have one. You may look at your portfolio and conclude that your losses are due to the global reaction to the spread of COVID-19 and were outside of your advisor’s control. But now is also a good time to dig deeper and attempt to determine whether your advisor is still acting in your best interest.  

Know What You Own And Why You Own It

There are a lot of sub-par financial professionals, and perhaps even more sub-par financial products, that will have been exposed by this crisis. If you have a financial professional advising you on your portfolio, go on www.brokercheck.finra.org and see if your advisor has a history of customer complaints.  And regardless if your advisor has a history of customer complaints, take a hard look at your portfolio and figure out what you are invested in.  

Portfolio risk generally comes to fruition when the market pulls back. If your investment portfolio is heavily concentrated in energy stocks or bonds like oil and gas companies, hospitality stocks or bonds like airlines and cruise lines, or Real Estate Investment Trusts, then you have likely suffered disproportionately high losses. 

Recent market turmoil has proved disastrous for a number of complicated investments. Many investment products, such as some of UBS’s “ETRACS” leveraged and inverse exchange-traded-notes and Barclays OIL ETN have imploded.  The massive United States Oil Fund (USO) dropped more than 80%.  Elsewhere, the Goldman Sachs MLP Income Opportunities Fund (GMZ) dropped around 80% in value in the last six or so weeks; the Clearbridge MLP and Midstream Fund (CEM) dropped around 80% in the last month; Tortoise Energy Infrastructure (TYG) was trading close to $20/share on January 16, 2020 and is around $5.00 per share.

The dust has not yet even settled. If history is any indication of things to come, we expect structured products and notes – include so-called “principal-protected” notes –  as well as hedge funds, private equity funds, and additional ETNs and ETFs to be hit hard, resulting in billions of dollars in investor losses.   

Even allegedly conservative “yield enhancement” strategies that were pitched as a low-risk way to generate additional income have been crushed, like UBS Financial Services’ yield enhancement strategy, the Harvest Collateral Yield Enhancement Strategy sold by Merrill Lynch, as well as other allegedly yield-enhanced strategies recommended by J.P. Morgan, Morgan Stanley, and most other full-service broker-dealers. 

If you have exposure to complicated financial products in your portfolio and have not already done so, pick up the phone, call your advisor, and ask for a full portfolio review. Ask your advisor to compare your performance against other performance of the S&P 500, the bond markets, and appropriate indices based on your investment objectives and risk tolerance. Most importantly, listen to the answers and make sure that you are not just being told a story.

The answers must make sense. If your advisor tells you that a 50% drop in your portfolio is “just because of market forces,” don’t believe it. There are thousands of excellent financial advisors who would be happy to help you manage your money. If your advisor is giving you salesman-like, unacceptable, or nonsensical answers, you might want to consider moving your money. Now is not the time to play ostrich and bury your head in the sand. You should regularly review your account holdings, speak to your financial advisor, make sure you understand your investments, and pay attention to the activity in your accounts.

The Financial Industry Regulatory Authority is a private entity that exists under the guidance of the Securities & Exchange Commission and is responsible for policing broker-dealers in the United States.  Under FINRA rules, recommendations to investors/customers must be “suitable.”  That means that when your financial advisor makes recommendations for you to purchase securities or utilize a particular strategy, such recommendations must be consistent with your investment objectives and risk tolerance. If, for example, you have a conservative tolerance, your advisor should not have loaded up your portfolio with energy MLPs and leveraged ETFs.

When all is said and done, investor losses as a result of COVID-19 will result in the trillions. The vast majority of those losses will be matter-of-fact portfolio declines. But some, as with any crisis, will be the result of advisor negligence or outright financial fraud. 

If you suspect that losses are the result of the negligence or intentional wrongdoing of your advisor, call a securities lawyer who specializes in financial services and financial advisor litigation and arbitration, most of whom provide free case evaluations.  If your money is with a large financial institution like Merrill Lynch or Morgan Stanley, any case likely would be a private FINRA arbitration, rather than in court.  Many cases against investment advisors are subject to mandatory arbitration, but in different forums than FINRA.  

In sum, be proactive, make sure you understand and are monitoring your portfolios, and know that you have legal rights if your advisor has mismanaged your portfolio.

Brian Levin is the founding and managing partner of Levin Law, a national securities and class action law firm.  Brian Levin, Levin Law’s founding attorney, has secured settlements and recoveries in securities arbitration and class action matters of over $100,000,000 in assets for individual and institutional investors throughout the country and the rest of the world. Levin Law represents retirees, individual investors, high-net-worth investors, ultra-high-net-worth investors, institutions, family offices, trusts, publicly held companies, and others.  More information about Levin Law, P.A. can be found at www.levinlawpa.com.  Brian can be reached at brian@levinlawpa.com or 305-402-9050.

Photo by Sean O. on Unsplash