As the market soars to record highs, advisers try to temper client expectations amid worry of a stock pullback.
With the stock market climbing ever higher, financial advisers are taking further steps to prepare portfolios for a pullback. They’re also actively helping clients curb their enthusiasm — and fears — about the new peaks in the Dow Jones Industrial Average.
The Dow closed above 15,000 for the first time Tuesday and extended those gains through today, if only slightly.
Some advisers are building up client cash stockpiles and moving larger portions of client portfolios out of equities. In fact, $4.3 billion flowed out of stock mutual funds over the week ending May 1, according to the Investment Company Institute. That’s the first time that sector has seen outflows all year.
“People are kind of spooked from what happened in 2008 and saying, ‘I’m not getting fooled again,’” said financial adviser Paul LaViola of RTD Financial Advisors Inc.
He is recommending clients take profits and sock away the cash they’ll want access to over the next two years in highly liquid accounts. He’s also doing some rebalancing into short-term bonds.
Jeffrey R. Miller, chief investment officer of Armor Investment Advisors LLC, said he isn’t selling equities at this point, but he isn’t reinvesting interest and dividends into them either.
Those payoffs are going into short-term fixed income and short-term corporate investments. The firm already trimmed its long-term bonds over the past year, he said.
The firm is still investing new money into equities, but very carefully. For instance, emerging markets have trailed the U.S. equity markets substantially in the past four months, suggesting there’s more value to be had there in the long term, Mr. Miller said.
“We’re still making some equity investments, but being slow and deliberate about going into anything in the equity space,” he said.
In reaction to phone calls from investors and as part of regularly planned portfolio review over the past month, advisers are warning investors that a pullback should be expected and are showing them how they've already benefited from the run-up.
“I try to take the emotion out of investing by focusing on valuations,” said Jeremy Kisner, an adviser and president of SureVest Capital Management. “I tell them to tune out all the stories in the news.”
Over the past month or two, clients have worried that the U.S. equity market is rising so fast that it's destined to crash. The market will go down, Mr. Kisner tells them, but not in the huge and disastrous way it did in 2008.
“We definitely could and probably will have a 5% to 10% correction,” Mr. Kisner said he tells clients. “But I think you are worried about having another 2008, and I don't think it will happen.”
He backs up his declaration with the following logic: Equity valuations are responsible, company balance sheets are stronger than they have been in decades, the U.S. economy is growing, if slowly, and U.S. companies are growing even more because they are selling huge into China, India and other countries.
He also reminds clients that their portfolios are hedged so there's built-in protection for any downturn greater than a typical 5% to 10% correction.
The Dow is up 15% for the year (25% over the last 52 weeks) and up 6% over the past two months. After closing at 15,056.20 yesterday, the benchmark was ahead another 7 points this afternoon.
“We tell clients, 'Yes, the markets are reaching all-time highs, but we anticipate a pullback that would be healthy for any markets,'” said John West, an adviser with Spraker Wealth Management Inc. “Markets can't continue to go up every day.”
He also reminds them that the firm regularly takes profits for clients.
A 40% rise of any investment touches off a conversation of Spraker's financial professionals about whether it's time to take the gain and reinvest the funds elsewhere. Over the past three months, the firm has sold shares in Ford Motor Co. (F), Altria Group Inc. (MO) and The Procter & Gamble Co. (PG), according to Mr. West.
Clients who have been with the firm for a decade or longer are easiest to keep on an even keel, Mr. West said. Those who have become clients in the past year typically are almost fully in cash because they have been sitting out the market over the past four or five years.
“With those clients, we are tempering expectations and explaining that when we get a pullback, we will start putting a percentage of their cash back to work,” Mr. West said.
Lili Vasileff, a financial adviser and founder of Divorce and Money Matters LLC, said a large client recently e-mailed her asking what she thought about “the bubble,” and included a link to a video that was “full of gloom and doom.”
She reminded the woman that her diverse portfolio is designed based on historical performance in both bull and bear markets. She also told her that any holding that declines 2.5% is re-evaluated to see if any changes are needed.
“That gave her a sense of comfort,” Ms. Vasileff said.
Ms. Vasileff doesn't contact her clients with market news because she has found that the action itself causes clients to ask if they should be afraid. Instead, she sends out a monthly newsletter with information about other issues, such as taxes or long-term-care insurance.
Scott Brewster, president of Brewster Financial Planning LLC, said he hasn't heard much from clients.
“I think clients are holding their breath and afraid to mess up the recent good fortune.”
