One possible sign that advisers are doing a good job: Most clients appear to be taking the recent sell-off in stocks and jolt of market volatility with relative ease.
“My clients are definitely not getting skittish right now,” said Theodore Feight, owner of Creative Financial Design.
“We're in the second year of a president's second term, and that usually represents a slightly down or flat year,” he said. “Right now, I'm trying to decide if I want to do some tactical allocations to the emerging markets and Europe, which have seen some improvements in the last 60 days.”
Five years into a bull market run and on the heels of a 30% gain by the S&P 500 last year, it is not unusual for investors to get a little nervous when volatility picks up. But the general mood among the pros is that this is not the time to take money off the table.
“It's been a year and a half since we've had a pullback of at least 10%, so even some of my clients with cash on the sidelines are getting cautious,” said Mark Stancil, portfolio manager at French, Wolf & Farr Investment Advisors.
“From an advisory perspective, this is different than 1999 when folks couldn't get that last dollar invested fast enough,” he added. “Right now if we saw some further pullback I would view it as an opportunity to deploy some assets.”
The Dow Jones Industrial Average, which lost 266 points on Thursday, was down more than 100 points by midday Friday, leading to fresh talk of a long-awaited correction.
Even with a relatively strong February, the Dow has fallen more than 2.5% from its Dec. 31 record high.
The technology- and smaller-company-weighted Nasdaq 100 has experienced the brunt of the volatility, with the benchmark falling 3% on Thursday.
But financial advisers say all the recent volatility has not yet been lighting up the phone lines with calls from nervous clients.
“We haven't had one client yet really concerned about the overall market because the volatility has been from the Nasdaq and not the Dow,” said Doug Flynn, co-founder of Zito Capital Management. “Some biotech stocks doubled last year, so you get the downside volatility. So far, the sell-off has been more isolated to the sectors that went up the most last year.”
Brendan Connaughton, chief investment officer of ClearPath Capital Partners, said, “nothing is broken,” and that investors should be paying attention to hard data and not worry so much about which direction the herd is moving.
“When investors see these kinds of market characteristics, they get nervous, and if someone heads for the exits, a lot of investors will follow,” he said. “All investors should be comfortable with higher volatility in 2014.”
Eve Kaplan, owner of Kaplan Financial Advisors, said focusing on market volatility with clients even when markets are smooth helps to keep them from panicking when things get choppy.
“If we have a 2% or 3% correction in one day in the market, my clients aren't calling me and I'm not calling them to hold their hands,” she said. “I put market volatility into the context of the big picture, and the phone just isn't ringing in an up or down market.”
Reacting to sudden market gyrations is the difference between a market timer and an investor, according to Kenneth Klabunde, founding principal of Precedent Asset Management.
“Any pundits who provide a prediction for where the market is going to be in the next three to nine months have no clue what they're talking about,” he said.
Mr. Klabunde sent an e-mail to clients, reassuring them that the best action is to stay the course during times of market volatility. He reminded them of the diversification and margin-of-safety elements built into their portfolios to increase stability.
“These principles make short-term market fluctuations irrelevant for people who are investing in order to reach long-term goals,” he said.
— Jeff Benjamin, Bruce Kelly, Mark Schoeff, Liz Skinner and Joyce Hanson