Stocks on a tear — what's an adviser to do?

Feb 10, 2013 @ 12:01 am

Signs are everywhere that investors are coming — no, rushing — back to stocks. For the one-week period ended Jan. 30, investors plowed $8.18 billion into equity mutual funds, the Investment Company Institute estimated last week, up from $6.35 billion a week earlier.

In the first four weeks of the year, an eye-popping $38.1 billion went into equity mutual funds.

Compare that with last year, when cash flowed out of equity mutual funds like water from an open fire hydrant. Investors pulled money out of these funds every single month, hitting a crescendo in December with a $30.5 billion withdrawal, according to ICI data.

According to research firm Strategic Insight, investors yanked more than $100 billion out of stock mutual funds overall last year.

And that's just 2012. Equity mutual funds have endured net outflows every year since 2008.

At the same time, investor interest in bond funds appears to be fading. The ICI reported that such funds had estimated inflows of $3.5 billion during the one-week period ended Jan. 30, down from $8.06 billion the previous week. Tales of an impending bear market in bonds, bursting a bubble that some contend has been developing for 30 years, are being heard more and more.

But are investors jumping into stocks at the wrong time?

After all, the S&P 500 returned a solid 16% last year and shot out of the 2013 gate with a January return of about 6%. Interest rates remain at rock-bottom, if artificially low, levels.

The jury is still out on whether the so-called great rotation out of bonds into stocks is at hand. You can find articles about why we are on the cusp of a bull market in stocks and those about why we are at the end of one.

The upshot is that this is the time for financial advisers to take an active role in helping clients navigate this thicket. Now is the time to shine.

Advisers who want to be stars with their clients shouldn't wait for them to call wondering what to do: Jump with two feet into stocks, wait for some sort of bull market confirmation or take a portion of profits off the table and move into something “safer.”


Some clients will be all too eager to adjust their asset allocation and load up on equities, while others will be happy to keep things the way they are. Many, if not most, however, won't know what to do and will be looking to their advisers for answers.

Advisers should call them and set up a meeting. They should let their clients know they are on top of the situation, fully aware of what is happening in stocks and bonds.

In other words, advisers should do their homework. After all, this is just what they get paid to do.

Investors are like everyone else. They have short memories. They forget their risk tolerance. They forget to re-balance. They look to their adviser to be their financial compass.

It has been only four years since the financial crisis pushed the U.S. economy into its Great Recession. The big rotation then was out of risk assets, such as equities.

As usual, though, retail investors were the last ones out the door and thus suffered the most as stock prices plunged. Balances in 401(k) plans plunged with stock prices.

It has been a hard slog back. Indeed, while stock prices are nearing historic levels — the blue-chip Dow Jones Industrial Average has been trading around 14,000 after piercing that number last month for the first time since October 2007 — economic growth remains tepid and unemployment high.

A great postscript to the economic recovery would be that advisers heeded the lessons of history and helped clients manage a major market transition, and that for once, retail investors weren't the last to act.


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