Despite the sell-off Monday and Tuesday, the stock market's strength this year (and over the previous 12 months) has been breathtaking. Advisers are being hit with two questions: Should I cash in my chips? Or should I add more to the pot?
It's a big decision, prompted by big moves in the stock market. As of the close of trading Monday, the Standard & Poor's 500 index had soared 6.8% so far this year, including reinvested dividends, according to Morningstar Inc. That's more than half the 10.2% average annual return from large-company stocks since 1926. Nearly 60 U.S. domestic mutual funds have already beaten the long-term average this year.
"The S&P 500 has gone 564 calendar days since the conclusion of the last decline of more than 5%, which is longer than any period since 1945," Sam Stovall, chief investment strategist for CFRA, said in a note to clients Monday. "The S&P 500 now stands at nearly 7% above its 50-day moving average, and 14% higher than its 200-day average — both of which exceed 1.5 standard deviations from their means since WWII."
For advisers, the market's rapid rise has prompted two responses from investors: fear of a crash and fear of missing out. Let's start with those who are
worried about a crash.
"It seems that most clients are more anxious about the market than enthusiastic about it," said Abe Ringer, principal at Breakwater Financial. "My message is simple: Let's focus on what we can control, rather than what we cannot. We cannot control, predict, manage or influence the direction of the market. We can only stick to an allocation we can live with over many market cycles — in my practice, that also comes with a bias toward value — and focus on the elements of our personal financial lives that we actually can have an impact on."
Many of those most worried about a downturn are seniors, who may not be able to make up losses in a big drawdown.
"I work with mostly 60-year-old-plus clients," said Richard Bergen, principal at RLB Wealth Planning Inc. "Their concerns about the stock market have been centered around preparing for a downturn, not missing out on the upside. I have tried to position most clients in balanced portfolios, including some
alternative strategy funds for further risk mitigation. As such, I haven't made changes to the mix. The exceptions are where clients are drawing funds regularly for income — in which case, I have recommended putting three years' income in cash, CDs or other ultra-short term investments as a bucket for future distributions."
But Karen Van Voorhis, a vice president at Sapers & Wallack Inc., thinks that clients' positions in the stock market are a big determinant of whether they are eager to jump in or out of the market.
"If they are fully invested, they are worried about a forthcoming downturn," she said. "So then they think they should be in cash, but rates are so low that the perception is that they aren't 'getting' anything, because simply the avoidance of stock market risk isn't generally perceived as a positive. If they are in cash, they are worried about missing out on stock market gains."
(More: 11 funds that have beaten the market's long-term average gain — in less than a month)
Not everyone is worried about a
crash, however. "Some clients have been calling during the ride up asking if this is too good to be true, and telling me they are nervous about a downturn," said Austin Frye, president of Frye Financial Center. "When I suggest to them that if they are nervous about things, perhaps we should rebalance and take some gains off the table, they turn me down. The metaphor I use for this behavior is as follows; They are at a terrific party that everyone knows has to end at some point, but no one wants to leave the party too early, afraid that they may miss out on more fun to come."
A few advisers have heard from clients who want to jump into the already hot market — and that may not be a good sign for the market's future prospects.
"My clients have been asking to invest more into stocks at this time, and it is a sign to me we will experience a downturn sometime this year," said Alexander Khoury, wealth adviser for Values Quest Inc. "I keep things in perspective with my clients that we are well-positioned to buy on a significant drop when the time is right. Other than that, we stay true to our risk tolerance and asset allocation."
The biggest danger to these investors: They could get burned and turned off permanently from investing, Mr. Khoury said.
"It is very easy for someone to invest today, see their account drop, sell out and take a loss, and then be frustrated," he said. "Keepthe bigger picture in mind, and if you cannot do it yourself, talk to a financial adviser to help you."
(More: Shrinking cash balances provide latest evidence of investor euphoria)
