DETROIT — The rapid rise of equity markets over the past few months has introduced a new challenge to some financial advisers: keeping clients focused on long-term objectives.
The Dow Jones Industrial Average eclipsed the 13,000 mark in late April, setting a record high for the 111-year-old stock market index.
“It doesn’t matter if you’re a sophisticated investor or not; I think it is human nature to get excited about the market whenever you cross over a significant milestone,” said Sam Jones, president of All Season Financial Advisors Inc. in Denver.
“You see something move fast, and you want a piece of it,” he said. “We all feel that way, including me.”
The firm manages $125 million for clients that meet a $250,000 initial investment requirement.
Mr. Jones said that investors at all levels can be subject to the psychological lure of stock market moves.
Part of investors’ excitement over the latest milestone stems from the fact that the index surpassed the 12,000 mark just six months ago.
It took almost seven years for the index to close at above 12,000 in October 2006.
‘Recipe for disaster’
This exchange’s heady ascent has some clients wondering if the Dow could soon breach 14,000.
“I’m hearing from investors who want to get more aggressive, and people are acting like there’s no risk in the market,” said Don Shreiber, president and chief executive of WBI Investments in Little Silver, N.J.
“Greed is starting to run rampant again, and that’s a recipe for disaster.”
But realistically, it might be time to make some portfolio adjustments — just not the kind of adjustments most retail-class investors are considering.
“Investor comfort is not necessarily a good sign for the market,” said Frank Marzano, managing principal at GM Advisory Group Inc. in Port Washington, N.Y.
“Whenever the Dow approaches a new high, there are common issues that need to be addressed when talking with clients, because of the psychological effect,” he added.
In doing so, advisers are learning that not all investors think alike.
“We had a client who was just about to start working with us when all the attention turned to the Dow breaking 13,000, and suddenly, he thought the market was too high and that it wasn’t the right time to invest,” said Frank Moore, founder and president of Vintage Financial Services LLC in Ann Arbor, Mich.
Mr. Moore, who oversees $140 million in client assets, reassured the client by explaining that the Dow was around the 1,100 mark when he started in the financial advice business in 1983.
He also reminded the prospective client that the market is significantly larger and more diverse than the 30 stocks that make up the Dow Jones Industrial Average.
“Sometimes clients seem to think everything is going into the Dow,” Mr. Moore said. “We explain that we’re more broadly diversified than that.”
Psychology and basic human factors are bound to come into play regarding where the market heads from here, according to Jeff Kleintop, chief market strategist with
LPL Financial Services in Boston and San Diego. “The rally, to this point, was driven by institutions and hedge funds, but [two weeks ago] was the first week in a month that we saw net inflows to mutual funds,” he said.
“That suggests two things: Individual-investor demand could help sustain the rally, and we can now start to worry if individuals are coming in at the wrong time.”
Based on the latest economic data, Mr. Kleintop is predicting a “soft landing” as the first-quarter-2007 corporate earnings come in at around 8% for the Standard & Poor’s 500 stock index, representing the first single-digit growth rate in 14 quarters.
“That’s where you’ll start to see a shift from value to growth outperforming,” he said. “As earnings’ growth gets more scarce, people will be willing to pay up for it.”
Some market watchers have expected the housing market to hamstring the financial markets.
But that has yet to happen and likely will not be as severe as originally anticipated, according to Bill Cheney, an economist at John Hancock Financial Services Inc. in Boston.
“It seems the troubles in the housing sector will remain confined to housing,” he said. “Business capital spending has been weaker than expected over the last six months, but it seems to me if the businesses keep on hiring, they are going to have to start spending money to equip the employees.”
