Stocks have fallen dramatically since last October, and if you’re paying any attention at all you are probably at least wondering when the bad news will end and whether or when to throw in the towel. Some investors are distressed and even angry that the professionals they depend on haven’t protected them from losses.  

So who’s your friend now? More specifically, who is responsible for protecting you from losses in a bear market? Your mutual fund manager? Your broker? Your financial adviser? Is it the government? (Shouldn’t there be a law against a financial system that makes your money evaporate?)

Though the answer isn’t simple, I think it’s pretty straightforward.  

When I was a youngster, I learned a very important lesson from my father.  Dad was a pediatrician for more than 30 years and believed that most of us need to take care of ourselves.  I didn’t see much medicine dispensed in our home.  One of Dad’s favorite sayings was: “If you get a cold, and I give you medicine, your cold will almost certainly go away in two weeks.  However, if you get a cold, and I DON’T give you medicine, your cold will almost certainly go away in two weeks.”

His point: Your job is to take care of yourself and avoid taking drugs unless you really need them. This applies to investing, too.

YOUR MUTUAL FUND MANAGER

Some people think that a mutual fund manager should protect them from a market slide, either by choosing only investments that won’t ever go down (Good luck!) or by shifting into cash before losses get out of hand. A few mutual funds are designed to make such market-timing moves, but most don’t try anything like that. It’s true that some fund managers sell parts of their portfolios waiting to buy back at bargain prices, but the reason isn’t to protect against losses. Most funds have a commitment to remain invested in certain asset classes regardless of how those asset classes are performing at any given time.

Most equity funds try to keep less than 10 percent of their holdings in cash. Very few managers want to live or die by how well they can predict the best times to be in the market and the best times to be in cash. (If the professionals shy away from this, that should give you a clue about how likely amateur investors are to succeed at it.)

The verdict: You can’t rely on your mutual funds to protect you when stocks crash.

YOUR BROKER

Many investors have first-name-basis relationships with brokers. They might naturally expect that a broker who is their “friend” will alert them when they should sell and go to cash. But brokers aren’t trained to figure out when to be in the market and when to be out. Brokers are trained to sell stocks, bonds and other products. For the most part, their compensation is based on sales, not on whether their clients do well or poorly in the market.

You should expect your broker to answer your questions and communicate with you in a straightforward, supportive way when the chips, as they say, are down. You should expect your broker to execute trades for you in a timely manner at fair prices. But don’t expect your broker to tell you to dump what he or she has recommended. Brokers don’t have crystal balls, and they know they are in danger of losing their clients’ business if they admit to clients that their recommendations were unsuccessful (or even foolish) in retrospect

The verdict: You can’t rely on your broker to protect you when the market is down.

YOUR INVESTMENT ADVISER

You may think of your broker as your investment adviser, but for purposes of this discussion I will define the term to mean a financial professional who does not sell products or get paid on the basis of commissions.

Ideally, your adviser is your coach, your teacher, your advocate and your guide. When everything is hunky-dory and you’re making money with barely a worry, your adviser’s job may be easy. But in difficult times, a good adviser definitely earns his or her keep.

Your adviser should provide you with the tools to succeed, including figuring out how much risk you can tolerate and how to  tailor your investments accordingly. But just as a coach can’t actually run your exercise laps, your adviser cannot force you to do what it takes to be successful.

In a recent Dalbar study, 68 percent of the investors who were polled believed their advisers’ jobs included protecting them from losses. Unfortunately, your adviser doesn’t have any magic power to do that. Even the best advisers don’t know when the markets are certainly headed up and certainly headed down.

Verdict: Your adviser should show you how to protect your assets. But no adviser can do it for you.

YOU

If you can’t rely on your mutual fund manager, your broker or your investment manager to protect you from losses, that leaves:  You.

The best investors understand risk and  how they react and relate to uncertainty. They have decided or discovered what sort of disappointments they’re willing to accept in order to seek long-term benefits. This isn’t much different from many areas of our lives. We all tolerate less than perfect weather, less than perfect relationships, less than perfect products, etc. Ideally, we set standards for what we will no longer accept. Those standards are popularly known as boundaries.
If you don’t set investment boundaries, you can expect rocky consequences. If you set them well, then you’ll know how to weather the storms and be ready when the sun shines once again.

Only you can set your boundaries. But if you’re smart, you’ll use your adviser to help you set sensible boundaries based on reasonable expectations. Some boundaries may be little more than gut reactions to downturns in the market; when that happens, a boundary that was supposed to protect you may turn out to hurt you instead.

If you have discussed this in detail with your adviser ahead of time and a bear market tempts you to throw in the towel, your adviser can help you honestly re-assess your boundaries and see if they really make sense.

As my father often told his kids and his patients, an ounce of prevention is often better than a pound of cure. He knew that was true in the field of health. I know it’s equally true for investors.  

Tom Cock is a financial educator for Merriman Berkman Next