Time for a gut check on risk tolerance

C'mon, financial planners and investment advisers, duty calls. With the stock and bond markets both showing signs of capitulation — bonds for good and stocks for bad — now is the time for financial planners and advisers to reach out to their clients and keep them from panicking and doing anything they would likely regret. E-mails should be flying and telephones ringing off the hook with words from advisers encouraging investors to hold steady to their long-term plan, making at most small changes at the margins.

INFECTION SPREAD

The sell-off that began in emerging markets and spread to global equity markets intensified last Monday with the Dow Jones Industrial Average plunging 326 points, or 2.1%, to 15,373. Meanwhile, the S&P 500 lost 40 points, or 2.3%, to settle at 1,797, its lowest close in more than three months. Year-to-date through last Friday, the S&P 500 was down 2.8% after a bounce late in the week. The drop follows a heady 30% rise last year. The DJIA is off 4.7% year-to-date after rallying 26.5% in 2013. Meanwhile, the Barclays U.S. Aggregate Bond Index, which tracks investment-grade corporate bonds, is up 1.2% year-to-date after plummeting 4% in 2013. Like lemmings, investors appear to be chasing performance.

EQUITY LOSSES

U.S. equity funds hemorrhaged $24 billion for the one-week period ended Feb. 5, according to a report last Friday from Citigroup Inc. U.S. bond funds benefited to the tune of $13 billion, the report said. The sudden and dramatic change in market conditions gives planners and advisers the opportunity to let their clients know that they are looking out for their interests and to show them the value of their training and experience.

LESSONS FORGOTTEN

It also gives them another opportunity to examine the clients' true risk tolerance, an important part of any financial and investment plan. Although the risk tolerance of most clients was tested in 2008-09, many no doubt forgot the lessons as the market soared last year. Above all else, this wave of volatility and uncertainty in the market, even if it persists, provides another opportunity for planners and advisers to cement their relationships with clients, to educate them about the realities of investing, and to review and sharpen clients' plans after the latest stress test, if necessary. Remember, it isn't all about the numbers.