Recovering Coronavirus Stock or Investment Losses

Most investors have experienced sudden and substantial losses in their investment accounts during the Coronavirus (COVID-19) pandemic of 2020.  In March 2020 alone, the S&P 500 experienced a 33% decline versus its February 2020 high.  Do investors have strong cases to pursue against their financial advisors and brokerage firms?  The simple answer is:  It depends.  Investors (1) whose accounts were suitably invested, and (2) who understood the actual risks of their portfolio, likely do not.  

So, which investors have strong cases for recovery of losses?  Investors with potentially strong claims to pursue include those whose financial advisor recommended or caused:  

  • Excessive concentration in risky securities (such as retirees whose accounts were concentrated in: stocks instead of high-grade bonds; specific industries (airlines, banks, energy); REITs; or “high yield” bonds or bond funds.

The age-old rule of thumb in the securities industry is that the percentage of an investor’s portfolio allocated to low-risk bonds (or fixed income) should be a percentage equal to their age.  

The U.S. Securities and Exchange Commission (SEC) has emphasized this reality as far back as 2009 when it issued an Investor Bulletin discussing the importance of proper allocation between stocks and bonds.  In it, the SEC stated that, “As a result, an investor approaching a financial goal might increase his or her bond holdings relative to his or her stock holdings because the reduced risk of holding more bonds would be attractive to the investor despite their lower potential for growth.”

For example, under this rule of thumb, if someone is 75 years old, and approaching full retirement, 75% of the portfolio should be allocated to low-risk, high-quality bonds.  Unlike sharply declining stocks, such bonds increased in value during the first quarter of 2020.  So, even if during the coronavirus period a 75-year old with a properly allocated portfolio lost 30% of the value in their account that had been allocated to stocks, their overall stock losses would have only been 7.5% of the entire portfolio (a 30% loss on the 25% stock allocation).  Since, in that same portfolio, the 75% that had been allocated to quality bonds actually made money, the overall loss in the portfolio likely would have been less than 5%.     

  • Only small (or no) allocations to high-quality bonds (such as U.S. Treasury Bills, Treasury Notes, Treasury Bonds, AAA and AA rated corporate bonds).

“High Yield” bonds, including the name of any mutual fund or ETF which contains the words “High Yield,” are junk bonds. The SEC readily notes that “high-yield bonds” are also “called junk bonds”. High-yield bonds have unique, and often substantial, risks that high-quality bonds (such as U.S. government bonds or AAA or AA-rated corporate bonds) do not possess. The SEC summarizes those risks as:

  • Default risk
  • Interest rate risk
  • Economic risk
  • Liquidity risk

High-yield (or junk) bonds have been recommended to investors in record quantities since 2010, as many financial advisors substituted high-yield bonds in place of what should have been high-quality bonds when constructing clients’ accounts.  If you owned high-yield bonds in March 2020, you suffered considerable losses.  If you are retired, or are nearing retirement, or told your financial advisor that you did not want risky investments, you have potential claims to pursue if you lost money in “high yield” (or, junk) bonds or bond funds during the Coronavirus (COVID-19) period.     

  • Margin borrowing recommended by their financial advisor.

See comments below under “Securities-based lending” and “PLA accounts.”

  • Securities-based lending account (or Portfolio Loan accounts, “PLA accounts”) recommended by their financial advisor.

The SEC published the following in 2015:  “An increasing number of securities firms are marketing and offering securities-backed lines of credit, or SBLOCs, to investors. SBLOCs can be a key revenue source for securities firms, especially in times of solid market returns and growing investment portfolios, when investors may feel more comfortable leveraging their assets.”  

But, Securities-based lending accounts, or Portfolio Loan Accounts (PLA), carry a number of risks, including potentially high risks, for your portfolio.  Indeed, the SEC writes that, “market volatility can magnify your potential losses, placing your financial future at greater risk.”  Included among those risks are potential unintended tax consequences and the possibility that you may, in fact, be forced to sell your holdings (to repay the PLA loan extended to you by the brokerage firm), which could have a significant impact on your long-term investment goals.

If you had securities liquidated by your brokerage firm under the terms of a margin account, securities-based lending account, or PLA, you may have potential claims to pursue against your brokerage firm for a recover of losses.  To determine whether you may have strong claims to pursue, one blog post from one of Wall Street’s largest defense law firms is helpful.  It suggests that brokerage firms should have: 

  1. Considered contacting customers with substantial margin balances “even before margin calls arise”; 
  2. Considered advising customers and brokers that they may not have time to use outside assets to meet margin calls; and, 
  3. Given advance notice to the customer of significant changes to margin requirements, if possible.  

Did your brokerage firm do any of these things with you before it engaged in a forced liquidation of some, or all, of your account?  If not, contact the Law Offices of Montgomery G. Griffin.  

  • Aggressive trading or “Buy the Dip” strategies recommended by their financial advisor.
  • Retirement accounts for many investors age 55 or older that lost a substantial percentage of their value in a short period of time. 
    • See the comment above that the “age-old rule of thumb in the securities industry is that the percentage of an investor’s portfolio allocated to low-risk bonds (or fixed income) should be a percentage equal to their age.”  Did your financial advisor concentrate your retirement account in stocks?  Did you suffer large losses in your IRA?  If so, you may be able to recover your investment losses.     

If you believe you may qualify for a recovery under any of these categories, please contact the Law Offices of Montgomery G. Griffin for a free consultation.