July 18, 2002 -- If your clients are concerned about the current market crunch, hold fast and stick with a diversified portfolio built for the long-term. So say financial advisors contacted by Fund Advisor.
"Investors who panic will miss out" on an upturn, says Michael Darden, a Lexington, Ky. financial planner. Seeing current fears as overblown, Darden feels that investors who sell now may not be able to recoup their losses later.
Changing your portfolio because of short-term factors is market timing, says Scott Leonard, an El Segundo, Calif. financial planner. "I don't know anyone who can time markets," he adds. Like other financial advisors we spoke to, he recommends a broadly diversified portfolio. Leonard believes people currently suffering deep losses don't have "truly" diversified portfolios.
Investors who sell now are selling at the bottom of the market, claims Peggy Cabaniss, a financial planner with HC Financial Advisers in Orinda, Calif. As a result, Cabaniss recommends that investors stick with their allocations, although "the downside is very hard emotionally."
Individuals should realize that equity investing is a long-term endeavor because downturns periodically hit the markets, notes Anthony Ogorek of Buffalo, N.Y.-based Ogorek Wealth Management. He notes that the current environment underscores the need for several strategies to minimize risk, including asset allocation, diversification, and "looser" correlating investments.
A weak market is "just part of the game," said Ogorek, who feels it stems from the market "coming off of a speculative mania." He thinks that a subsequent adjustment may lead to a "sideways market for a number of years." That outlook has led him to "reasonable" areas of the market, such as small-cap stocks, particularly international small-cap stocks, where he believes the opportunities are more favorable.
William Jerome, a financial planner in Scotia, N.Y., sees buying opportunities from the market declines. Sharp drops don't bother Jerome, who feels "the worse the market gets, the closer we get to a bottom." Jerome thinks some fears are irrational, so he's investing in companies currently facing challenges, such as Merck & Co (MRK). Despite these moves, Jerome suggests that "when you make a strategy for a five- to ten-year period, there isn't much point in changing it."
Although he's focused on the long-term, Jerome has advised a few clients concerned about the market to change their allocations, but he said that's due to client fears rather than any belief that it would help returns. For clients with low risk tolerance, Jerome recommends cash reserves covering two or three years of expenses.
For the most part, Jerome's clients aren't worried about the current market downturn, since only about eight of his 130 clients have contacted him recently. "Overall, our clients aren't making changes," says Jerome.
While against sudden portfolio shifts, Frank Armstrong, a Miami-based financial planner, has recommended in recent months that clients look at their risk tolerance and consider increasing their bond allocations by 10% or 20% "to preserve capital." Armstrong advocates lower risk profiles because he feels stocks and bonds may provide similar returns going forward. Within stocks, Armstrong recommends "a global diversification strategy" focused on international small-cap value stocks.
Scott Leonard also favors international investments, advising an "aggressive" equity position of 50% in international stocks and 50% in domestic stocks. Leonard's model asset allocation consists of 70% in stocks and 30% in bonds. He's comfortable with foreign stocks, saying "international is what's keeping our average portfolio above water this year."
The bottom line:
- Don't dump equities or equity funds out of panic.
- Review your clients' portfolios for appropriate diversification.
- Look into areas where opportunities may exist, such as international equities.
- Be sure you and your clients understand their risk tolerance.