The financial markets' continuing woes are driving some financial advisers to rethink the notion of buying and holding for the long term, opting instead for strategies that look a lot like market timing.
"We've allocated more to cash than we had in recent times," said Jim Holtzman, an adviser with Pittsburgh-based Legend Financial Advisors Inc.
Approximately 65% of the firm's $300 million under management is currently in cash positions, representing the largest cash weighting ever for the firm, Mr. Holtzman said.
At the start of the year, the firm's cash weighting was at 42%.
"We still have enough investments that it will help if stocks turn around," he said. "If we feel there's more downside pressure, then it is easy to sell; and you need to know when to cut your losses."
The days of simply setting an asset allocation strategy to buy and hold are gone for now, according to Mark Lookabill, chief strategist at Carson Wealth Management Group, an Omaha, Neb.-based firm that oversees $2 billion in client assets.
"We were a buy-and-hold type of firm up until the early part of 2000," he said. "I believe that strategy will come back, but that's not the case right now."
Mr. Lookabill said he started trimming his exposure to stocks a year ago, and until a few weeks ago, he had almost 40% in cash.
Some of that cash has since been used to buy municipal bonds, he said.
With the Dow Jones Industrial Average down 36% on Friday, year to date, and down 27% since the end of August, cash is suddenly king for some advisers who had not previously thought of themselves as market timers.
"My preference would be to buy and hold forever, but explaining to a client that they haven't made any money for 10 or 20 years doesn't go over very well," said David Blain, chief investment officer at D.L. Blain & Co. Inc. in New Bern, N.C.
Mr. Blain, who says he advises client assets totaling $70 million, has allocated 60% to cash or liquid-cash-equivalent investments.
"People will say they have a long-term time horizon, but most advisers' memories only exist from around 1982 to the present," he said. "If you stayed in the market from 1966 to 1982, an investor would have lost 11% after inflation."
Ironically, a lack of experience and historical perspective is also being cited by the buy-and-hold crowd as the reason some advisers can't stomach the current market conditions.
"It does surprise me that professionals who truly understand the markets would give in to their fears and pull out of the market," said Mal Makin, president of New England Professional Planning Group Inc., a Westerly, R.I.-based firm with more than $800 million under advisement.
"If you're not afraid today, [then] you don't understand the situation, but I still have a responsibility to my clients," he added. "We have a lot of younger advisers in this business who really have never experienced anything like this, and it takes a lot of courage for a young man or woman in their 30s or 40s to say to a client in their 60s or 70s, 'I'm sure you're safe.'"
Riding it out and sticking to the strategy has not been easy for Doug DeGain, a sole proprietor adviser in Rochester Hills, Mich., but he is more concerned about the alternative to staying in the market.
"I'm envious of any adviser who was able to dodge the bullet by getting out of the market, but I'd be more impressed if they'd share with us their next move on when to get back in," said Mr. DeGain, who advises clients on a flat-fee and retainer basis.
"I'm not a proponent of market timing, nor am I clairvoyant," he said.
While some advisers are determined to stay the course by encouraging clients that a long-term asset allocation strategy still makes sense, the fact is that the majority of financial intermediaries have never experienced the current levels of market turmoil and volatility.
Based on the severity of recent stock market swings and the flood into cash-related investments, it appears that more buy-and-hold investors are getting cold feet, according to Tom Ricketts, chief executive of Incapital LLC, a Chicago-based investment-banking firm that distributes products to 700 brokerage firms.
"I've never seen a market shift so dramatically toward so much liquidity," he said.
"There is definitely cash welling up in retail accounts, but the problem is, they don't have the alternatives they had a year ago, because money markets are now suspect, and auction rate securities aren't there anymore."
Mr. Ricketts is seeing the race to cash in the form of an unprecedented appetite for certificates of deposit, which are insured by the Federal Deposit Insurance Corp. through the end of next year.
Throughout the summer, he said, Incapital was distributing about $100 million worth of CDs per week through about 250 broker-dealer clients.
In September, the weekly volume reached $300 million, and since the start of October, sales have hovered at around $1 billion per week.
"I don't think I have to justify [the move into cash] to my clients, because they hire us to invest for the long term," said Bob Dubee, owner of Quest Financial Services Inc. in Lynnfield, Mass.
Mr. Dubee, who oversees $30 million in client assets, went from between 10% and 15% cash at the start of the year to as high as 90% cash by mid-September.
GRADUAL RE-ENTRY
He recently started moving back into the market and has trimmed the cash allocation to 80%
"I think we're going sideways for a while, but I feel like there's a bottom that has been built in," Mr. Dubee said.
Over the next six months, he expects to reinvest those client assets gradually in the stock and bond markets.
E-mail Jeff Benjamin at [email protected].
