Editor’s note: Christopher Baccella is a longtime columnist with Rethinking65. Read more of his articles here.
Christopher Baccella
What a difference a month can make! Stocks began 2025 on solid footing, with the S&P 500 rising 2.3% through the end of January following strong gains in 2023 (24%) and 2024 (23%). But although February started off strong, it ended with the S&P 500 down 0.3%. As of this writing, Julius Ceasar’s warning to “beware the Ides of March” holds true. There is a lot of red on our screens.
Investors, including our clients, are seeing a steady barrage of negative headlines in the press. Depending on the source of the news, some of these headlines can border on hysterical or fearmongering. For example:
Trump’s tariffs will cause inflation to spike. (This scenario could be bearish for bonds.)
Trump’s tariffs will cause an economic downturn or recession. (This could be bullish for bonds.)
Trump and/or Elon Musk will steal your Social Security.
As I’ve mentioned before, I generally attempt to avoid deep political discussions with clients. Rather than focus on these headlines, many of which are purely clickbait (which attract eyeballs, and in turn allow the publishers to charge more for ads), market pullbacks present a great opportunity for you to cement your role as a trusted advisor by providing reassurance and counseling to nervous investors.
Major indices, such as the S&P 500 and NASDAQ, have recently broken through their 200-day moving average — a sign of longer-term momentum, often seen as a support level. Currently, the NASDAQ is officially in ‘correction’ territory (defined as a decline of more than 10% from its high), while the S&P is flirting with that label. This is a good time to take a deep breath. The wheels are not coming off the economy. Social Security checks will continue to get cashed.
What’s Next?
This volatility presents a great opportunity to review your clients’ asset allocation.
First, some reminders:
All investing involves some level of risk. There is no foolproof investment strategy.
Corrections (defined as a decline of 10% to 20%) are normal. In fact, going back to 1980, the S&P 500 has been positive three out of every four years (75% of the time). During this time, stocks have experienced an average decline of 14% intra-year. This data comes from FactSet.
The S&P 500 ended 2014 at 2059 and closed out 2024 at 5920. With dividends reinvested, clients have tripled their money over the last decade.
The downside of this strong performance? The S&P 500 began the year trading at 27.1 times trailing earnings per share — about a 24% premium to its 10-year average price-earnings ratio of 21.8 times trailing earnings-per-share. In other words, stocks were not cheap.
Here are some questions to consider when reviewing client portfolios:
Has the Bull Market Led to an Overweight in Equities?
If this has happened to your client’s portfolio, it may be an opportunity to rebalance out of stocks that have been held for a long time. The proceeds could go to either fixed income (bonds) or cash (including money market funds). For some, this may be a good opportunity to build or replenish an emergency fund. This is especially true for clients in the withdrawal stage of their financial lives.
Sometimes, it is easy to forget the adage “buy low, sell high” and allow emotions to make investment decisions. Other times, volatility triumphs over complacency and motivates clients to take action. In small doses, this can lead to a desired course of action, such as rebalancing. But we should take care to ensure clients do not go overboard.
Do Clients Own Too Many Hyper-Volatile Stocks?
It does appear that we are seeing a rotation in the stock market, with many high-flyers down significantly. Of course, many of these same names have had big run-ups over the last few years, and volatility can cut both ways — up and down. Many of these names are concentrated in the artificial intelligence (AI) and cybersecurity sectors, and the stocks may have gotten ahead of themselves.
Are Clients Overconcentrated in a Single Name (or a Few Names)?
Clients sometimes fall in love with a stock. Over the years, I have seen this happen many times (“I love this company. It can’t possibly go down. I’m never going to sell it. I can’t afford to pay the taxes on the gain …”). Too often, clients envision their investments doubling in value every year or two. But as financial professionals, we all know that trees do not grow to the sky.
If Yes, What Is the Game Plan?
If any of the above questions receive an affirmative answer, we have work to do. But this is what we get paid for. As a reminder, we are the experts, and our clients expect us to have a plan. There are a few methods to exit positions described above. Unfortunately, we cannot cover every potential scenario, but here are a few thoughts:
An Outright Sale: As a reminder, there is no requirement to go all-in or all-out of a stock. Partial sales are OK. If a client is downright reluctant to sell out of a position, selling half or a third of their position can be a good start. If a client is still reluctant to exit a concentrated position, I sometimes suggest they “pull their cost out.” For example, suppose a client bought $20,000 of a stock that’s had a huge run-up and is now worth $250,000. Let’s take the original chips (plus enough to pay capital gain taxes) off the table, perhaps by selling $25,000 to $30,000. At least some diversification progress has been made.
Stop Losses: Stop losses can often help reduce risk by exiting a position that is selling off. Often, a stop order is entered below one or more key support levels. The idea is to prevent a “crash.” There are a few risks here, including getting whipsawed (a quick sell-off, followed by a reversal) or a stock “gapping” below the stop price. (In this scenario, the sell will typically get executed at the opening price.)
Diversification: As technology stocks have outperformed in recent years, many other sectors have been left behind. For instance, many financial stocks are trading at a low-teens P/E multiple, and offer attractive dividend yields as well.
For clients with large embedded capital gains, Mariner offers strategies, such as direct indexing, Donor Advised Funds, and tax planning, that can reduce the tax burden.
A Word on Bonds
As a reminder, bonds can offer a great way to reduce the volatility in clients’ overall portfolios, especially for clients who are in or near retirement. While the bond market has recently experienced its own bout of volatility, yields are still attractive and much higher than during the ZIRP (Zero Interest Rate Policy) era that we recently lived through.
When buying bonds, my advice remains the same:
Stay with investment-grade bonds. Focus on quality. Your clients are already taking a risk in equities. Let’s not double down by buying “junk.”
Mind the calls. Many new and recently issued bonds are callable after the first year or two.
Remember, the purpose of fixed income is to stay rich, not get rich.
Shorter and intermediate bonds (up to ten years in maturity) will typically have less interest rate volatility than long bonds (ten years or more).
Don’t forget to keep some cash and/or mutual funds for liquidity. This can reduce the risk of selling at the wrong time.
If you have questions about how to manage investments in this challenging environment, feel free to reach out.
Christopher Baccella, CFA, is aseniorwealth advisor withMariner. During a career spanning more than 25 years, he has provided investment and wealth management services to high-net-worth and institutional clients and served as a portfolio manager, investment research analyst, financial consultant and bond trader. He is a member of the CFA Institute and a past president of the CFA Society of Detroit. Chriscan be reached at chris.baccella@mariner.com. Click here for disclosures.
