Putting aside the 2020 COVID selloff, investors have enjoyed a historic climb in the stock market across the last sixteen years. The recent volatility isn’t fun for investors, especially those in or nearing retirement. Whether the return of such volatility is simply a return to historic norms (when we used to experience regular bull and bear cycles), or the product of other (temporary) forces, the effect is the same for investors. In English: a loss in your portfolio feels lousy, no matter the cause.
Good and bad financial advisors alike tell worried clients to “ride it out,” and to wait for the markets to return before selling securities or exiting the market altogether. That advice is great sometimes, and other times it’s simply a cover for a bad financial advisor caught out in the down market. The rising markets hide all sorts of ill-conceived investments. All too often, the cliché “a rising tide lifts all boats” rings true. Investors don’t tend to raise questions when their portfolios are growing in value, even when those portfolios are filled with lousy investments that happen to be riding the wave of a rising market.
What Should You Do When the Stock Market Drops?
What about when the stock market crashes? Selling good investments in a panic during a down market may not be the best idea. How, then, can the average investor who trusted their financial advisor know whether their losses are simple and unavoidable market losses or the product of their advisor’s wrongdoing? That’s not so easy to do.
One common way to tell is when the markets recover (and they almost certainly will). Did your investments recover their losses as the markets rose again? Or, instead, are you hearing about your friends’ portfolios returning to their previous highs while yours remains depressed? If it’s the latter, you may have fallen victim to an advisor who sold you products that weren’t in your best interest, or who built a portfolio poorly suited for you.
Another key thing to look for when evaluating your portfolio is a concentration in a single or a few securities, or a concentration in a particular asset class, like stock. Concentration adds risk, and that may be the cause of your losses. Another thing to keep an eye out for is a significant holding in private placements and non-traded securities. Securities not traded on the stock or bond markets are commonly called “alternatives.” They may or may not be correlated with the stock market, and often carry far greater risk than a well-diversified portfolio of publicly traded securities. They’re sold as a way to divorce returns from market fluctuations or as a way to produce steady income that stocks and bonds cannot provide. Those alternatives are often illiquid, meaning you can’t exit them if you later realize they aren’t right for you, or if you recognize the signs of a failing investment and want to cut your losses.
The Complexity of Modern Investments
Both good and bad portfolios typically have many moving parts, and today they are more likely to include complex non-traded alternatives than they were twenty or thirty years ago. To determine what went wrong, if anything, requires a strong understanding of investment theory, financial advisor standards of care, and mathematics.
Fortunately, the team at McCarthy Lebit understands these issues and, more importantly, understands how devastating an investment loss can be for an individual, a family, or a business. However, not all losses are the result of wrongdoing. Our team of experienced attorneys can help you identify the cause of your losses. If your damages resulted from a stockbroker’s or investment adviser’s misconduct, they’ll inform you and discuss your options in detail.
To seek counsel from our Investor Claims practice group, please reach out to request a consultation or call us at 216-696-1422.
Hugh Berkson is a Securities Attorney with McCarthy, Lebit, Crystal & Liffman, Co. LPA with over 20 years of representing individuals who have lost money due to the negligence of investors and brokers.
Hugh is a past President of the Public Investors Arbitration Bar Association (PIABA), an international legal association composed of practitioners who represent investors in disputes with the securities industry. He was also just re-elected to PIABA’s Board of Directors, where he has served as a director since 2011.
