Few things rattle Rich Zito.
Recently, however, he has begun getting nervous as some of his most conservative clients call and ask if they should invest more aggressively.
“Those calls are the canary in the coal mine,” said Mr. Zito, an adviser with Flynn Zito Capital Management LLC. “They usually mean the markets have gone up too fast and that the market run might soon be over.”
With the S&P 500 almost doubling from its low in March 2009, Mr. Zito is one of a number of financial advisers who are fielding calls from conservative investors asking if they should take on more risk in hopes of a greater return. Bullish investor sentiment has been on the rise in recent weeks, reaching 42.2% on April 14, slightly above the historical average of 39%, according to the American Association of Individual Investors.
The clients calling are the same ones who asked to go to all cash three years ago, advisers said.
“That's what we remind them of,” Mr. Zito said. “We say, "We're up almost 100% from the bottom, when you wanted to sell. And now you want to buy?'”
Mr. Zito isn't alone.
In light of the rise in the S&P 500 at the end of the first quarter, advisers are finding themselves in lengthy conversations reminding clients of the horrors of the market meltdown.
“I have clients who are up 3% and are asking why they aren't up 6%,” said Bob Weisse, director of research at Heritage Financial Services Inc. “These are the same folks that didn't want to lose 6% a year ago.”
Mr. Weisse said he asks clients how much risk they are comfortable taking.
“I say, "If the S&P goes up 15% and then drops, how much are you willing to lose?'” he said. “Just bringing up the subject brings flashbacks of 2008 and slows them down from wanting to take on more risk.”
BOND WORRIES
One reason that many conservative clients are calling now is because of the bond market's travails, advisers said.
With 10-year Treasuries yielding less than 3.5% and constant headlines about a bond bubble, investors are wondering if they should buy more equities, said Steve Johnson, an adviser with Raymond James Financial Services Inc.
“When the cab driver knows what to buy now, it gets scary,” he said.
Mr. Johnson advises some of his more conservative clients who want to be more aggressive to get into dividend-bearing funds. Specifically, he likes American Funds' Capital Income Builder Fund (CAIBX) and Thornburg Investment Management Inc.'s Investment Income Builder Fund (TIBAX).
Advisers such as Alan Galinsky, founder of Arch Financial Group LLC, are having similar discussions with their retiree clients, most of whom are affluent and risk-averse.
“Probably about 50% to 60% of our clients have asked us if we think they should change to more aggressive,” he said.
Mr. Galinsky has spent a lot of time addressing questions about whether performance gains have been justified during the market rally.
He said he discusses the Federal Reserve's rounds of quantitative easing and “the fact that the government is printing money to get the economy to recover, and it hasn't made a dent. What will happen when QE2 ends?”
Although many advisers want investors to remain in a conservative stance, some clients choose to edge their way toward higher risk.
About 30 of Arch Financial Group's 300 clients have moved to the firm's moderate model portfolio, from its conservative portfolio, while five have moved from moderate to growth, which still has about 20% in fixed income, Mr. Galinsky said. No clients have opted for an aggressive portfolio.
Although advisers are concerned about a market peak, investor sentiment numbers and mutual fund flow data indicate that there is still room to grow, according to observers.
One means of forecasting the future of the market is the American Association of Individual Investors' investor sentiment index. While sentiment has been bullish in recent weeks, it is still down from the beginning of the year, when it hit 55.9%.
“We would have to see bullish sentiment be well above 60% to indicate a market peak,” said Charles Rotblut, a vice president of the association.
For example, in March 2000, before the technology bubble burst, 65.7% of investors polled were bullish, he said.
The 2008-09 market downturn was so extreme that stocks still have a way to go toward recovery, said David Kelly, chief market strategist at J.P. Morgan Asset Management.
But a look at mutual fund outflows shows that a lot of investors still are not taking advantage of the run-up in the equity markets, he said.
ACTING CONSERVATIVELY
Last month, U.S. equity funds had $934 million in outflows, while taxable-bond funds had $18 billion in inflows.
“If you look at the actual behavior of investors, they are still acting conservatively,” Mr. Kelly said.
The calls from conservative clients are worth noting, but advisers shouldn't be overly concerned, said Bob Doll, chief equity strategist for fundamental equities at
BlackRock Inc.
“I see signs of it as well, but I am not overly concerned,” he said, noting that the fundamentals continue to support economic growth.
“The crowd can be ripe for a period of time. It's only when the last guy comes in that you should be worried,” Mr. Doll said.
E-mail Jessica Toonkel at [email protected].
