Prognosticating Prowess

Advisors use peer sentiment to weather stormy market conditions--PracticeEdge, the monthly best practice newsletter for March 2008

With growing fears of a recession, knowing your peers' outlook on the economy and stock market is imperative. It's equivalent to tuning into the latest weather report, then dressing accordingly or being prepared for subsequent weather-related driving conditions. The same applies to the market and advisors. By having an idea of where the market is headed, you may be able to adjust portfolios as needed to take into account potential market conditions.

Check Out the Forecast

Similar to how a meteorologist's weather forecasts can help you prepare for a trip, having a sense of your peers' opinions on the market may help you hone your own expectations.

It's valuable to know if your opinions on the market and the economy differ greatly from other advisors--professionals who likely have a similar business and knowledge base as you. This information acts as an additional tool to help give you a sense of the market's overall temperature and can help you form more informed opinions.

Created in 2004 to give advisors a better insight into how their market opinions compare to their peers, the Advisor Confidence Index (ACI) showcases advisor sentiment on both the stock market and the economy. Advisors who participate in the ACI say that it puts them "in the know" regarding their counterparts' economic opinions. Partially modeled after the Consumer Confidence Index, the ACI captures the sentiments of 150 independent registered investment advisors (RIAs) who participate in a monthly survey about their outlook on the economy for various time periods. Participating advisors answer four multiple-choice questions, reflecting their views on the current, six-month and twelve-month economic outlook and current stock market outlook--the resulting answers are then encapsulated into a single index number. The change in the index's value from the preceding month is then calculated and reported as a percent change. For instance, advisor confidence bounced back in March, after hitting a record low in January (see chart below).

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Unlike many weather forecasts, advisors tend to be pretty accurate in their assessment of stock market forecasts. For the past four years, via our Advisor Confidence Index, we've asked advisors for their thoughts on the economy and stock market. Then we took a look at how the index compared to the stock market movements during that time period and discovered that advisors correctly predict future market movement trends about 80% of the time.

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Be Prepared

Just like the Boy Scouts, an advisor should also be prepared. Currently many advisors see continued challenges in the market. To achieve their investment goals in today's volatile market environment, advisors are looking for different investment techniques and including more and more alternative investment products (See PracticeEdge January 2008.)

Alternative investments (such as hedge funds, real estate, commodities, currencies and managed futures) are becoming more and more mainstream and advisors anticipate a moderate increase in their allocation to alternatives over the next five years. As these vehicles become more widely accepted, we compared firms that offer alternative investment to those that don't and found out that those firms who do use alternatives are nearly twice as profitable (see chart below) as their counterparts.

PE0308-chart3.gifAs you consider the resources available to you as an advisor, don't discount the value of benchmarking your opinion against those of your peers. Take a regular reading of your positions and hold them up to those of others. Insights, such as the market sentiment outlook of your peers or profitability by product use, may provide you with additional insight on the marketplace as well as provide you with a different perspective.

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