With the equity markets cresting new thresholds and hitting record highs, financial advisers are finding themselves increasingly playing the role of psychologist to try and keep clients grounded and focused on long-term investment objectives.
“We're finding that some clients are wanting to get more aggressive than is good for them right now,” said Ross Levin, president of Accredited Investors.
“Whenever markets are going straight up, as these markets have been for four years, there will be clients wanting to get more aggressive and there will be those who get more nervous,” he said. “The markets can get expensive and stay expensive for a while, so we are reminding clients that every environment creates different risks and opportunities.”
On Thursday, the Dow Jones Industrial Average closed above 16,000 for the first time, the S&P 500 is also at a record and hovering near the 1,800 mark, and the Nasdaq Composite Index is closing in on 4,000, even though it is still well below the record of more than 5,000 set during the late-1990s technology bubble.
All three of the major U.S. equity indexes are up between 22% and 31% so far this year.
Although such powerful performance is difficult to complain about, it does represent unique challenges for some advisers.
“I'm not getting any feedback from the vast majority of my clients, but I've heard from a handful that have expressed both fear and greed with regard to the market levels, and we're trying to talk them through that,” said Peggy Ruhlin, chief executive of Budros Ruhlin & Roe.
She concedes that she has been expecting a market correction all year, and has been adjusting asset class exposure in client portfolios in preparation but without straying from the clients' respective investment policy statements.
Ms. Ruhlin's biggest challenge has been dealing with those clients who have been sitting on too much cash out of fear but are choosing now as the time to jump back into the equity markets.
“They've been holding all this cash, and now that the market has gone up, they want to invest it,” she said.
One of Ms. Ruhlin's clients had just moved a lump sum of cash to an account for safety but suddenly decided he wanted to put it into the stock market.
“I had to remind him why he moved that cash into a safe account in the first place and ask him what has changed in his life since then,” Ms. Ruhlin said.
Meredith Etherington, senior investment adviser at Litman Gregory Asset Management, is in the camp that thinks that the stock market is overvalued by as much as 20%, which can create obstacles for clients' bringing in new money.
“When it comes to new clients that have some cash, the real question becomes, 'Is now the time to put it in the market?'” she said.
The fact that the various benchmarks are reaching milestones at the same time may be just a coincidence, according to Sam Jones, president of All Season Financial Advisors, who described the index performance levels as “math magic.”
Like a lot of advisers, he is happy to take what the equity markets are giving, but he is also growing increasingly wary of the market's extended run.
“I think this market is way overbought,” Mr. Jones said. “Over the past 12 months, we haven't had a correction of more than 5%, and people are starting to think that's normal.”
Just as the market highs can lead to a blend of investor euphoria and paranoia, these levels can also put financial planners on the edge of their seats.
“We've been preparing clients for a pullback for no other reason than this market run has gone on for so long,” said Scott Oeth, principal at Cahill Financial Advisors.
“We have some clients that we have to rein in because they are so excited about the returns and they just want more,” he said. “But we have almost an equal number of clients who are concerned about a market fall from these levels.”
It is easy to compare big-picture data points, such as stock market performance levels, but just as every market cycle is unique, this one brings its own brand of unchartable plot points.
“Oftentimes, in a great bull market, it doesn't feel that way,” said Marty Leclerc, chief investment officer at Barrack Yard Advisors.
“Advisers have to remind their clients that these past few years were pretty unusual and they have to have a Plan B for when things change,” he said. “This has all been predicated on cheap money and that seems to be here for a while.”
Even if he felt the market was top-heavy and poised for a correction, Theodore Feight, owner of Creative Financial Design, is finding a silver lining in the botched rollout of the Affordable Care Act.
The technical snags and forced delays that prevented more people from signing up for the government health insurance program has temporarily delayed the negative impact on the financial markets, he said.
“I've been telling my clients that if Obamacare went through and everyone was forced to sign up, it would have taken enough money out of the market to cause a 10% to 15% correction,” he said. “As long as we don't have Obamacare shoved down our throats, the market should be OK.”