Cooler heads must prevail in times of capitulation

Advisers soon will see whether last week's reaction to events in the Middle East and North Africa will reverse the slow return of investor confidence that markets have been enjoying. Whether or not a turn in investor mood is upon us, now is the time for financial planners and investment advisers to step up to the plate and protect clients from their own worst instincts. It is up to planners and advisers to prevent clients either from fleeing or jumping recklessly back into the stock market without considering their goals and overall financial status. Notwithstanding last week, the stock market's yearlong rally has served as a temptation to investors fearful of missing out on a cyclical upturn. With one economic indicator after another returning to levels not seen since before the 2008 downturn, the major stock market indexes are moving rapidly into landmark territory. At its Feb. 18 close of 1,343.01, for example, the S&P 500 stood more than twice as high as its 666.79 intraday nadir March 6, 2009. Not surprisingly, retail investors want in on the action. Stock funds took in a net $15.8 billion in January, their best monthly showing since February 2006, according to Morningstar Inc. At TD Ameritrade Institutional's annual gathering of advisers this month in San Diego, executives reported that the number of average monthly trades increased to 372,000 during the fourth quarter of 2010, up from 318,000 in the third quarter. The increase, they said, suggests strongly that retail investors are starting to dip their toes back into the stock market — albeit tentatively. For further proof that the public's mood is lifting, look no further than the data released last week by The Conference Board Inc. On Tuesday, the nonprofit business research group said its consumer confidence index hit 70.4 this month, its highest point since February 2008. Given investors' penchant for jumping into the market at the tail end of an upswing, it should come as no surprise that this probably is not the best time to be shifting significant assets into equities. That's because the stock market's recent rally may be about to end — or at least take a bit of a breather. We may already be seeing signs of a market slowdown. Unrest in Libya and the Middle East last week sent oil prices soaring and the stock market tumbling. The S&P 500 declined 2.7% over the first four days of last week. And let's not forget two other rally-dampening forces closer to home: persistently high unemployment and an abysmal housing -market. Times like these, when rising investor sentiment appears to be on a collision course with downward market forces, give planners and advisers the opportunity to showcase the value of their profession. More importantly, it gives them the chance — no, make that the honor — of living fully into their role as faithful stewards of their clients' hard-earned savings. Besides keeping clients from marching like lemmings into the latest hot stock, bond or mutual fund, it is imperative that advisers develop long-term investment strategies suited to their clients' individual circumstances. Advisers also must make sure that their clients not only accept that plan, but understand it and, trite as it sounds, embrace it. Only then, when clients understand the benefits of such time-tested investment strategies as diversification across asset classes, portfolio re-balancing and dollar cost averaging will they be able to resist the siren call of the next stock market bubble or the latest investment fad. The stock market may capitulate, but financial planners and investment advisers never should. They are paid to keep their heads while other people are losing theirs. The current stock market volatility and geopolitical uncertainty provides yet another opportunity for planners and advisers to improve their relationships with clients, teach them the wisdom of having a solid investment plan and prevent them from doing anything they might regret the next time they open their account statement.