Market Effects of Client Dismay With D.C.—Searching for Alpha for October 2011

After spending most of the last two weeks on the road talking to clients, one thing is crystal clear: their disappointment with Washington. Although the European debt crisis, the slowdown in emerging markets and concerns of a double-dip recession are still in people’s minds, few clients I spoke to believe that the legislative or executive branches of the U.S. government either understand or can successfully manage the domestic economy. 

This mindset has resulted in lots of nervous investors trimming positions in front of the fourth quarter. Equities had a terrible month, the greenback and U.S. Treasuries were beneficiaries of panic buying, and credit spreads ballooned. During most of this debacle, many investors believe that President Obama was an absentee landlord. 

Folks seem to have keen memories of 2008 and what it did to their hard earned savings. They seem willing to slash positions and don’t seem concerned about missing gains if things get better. 

So what’s an advisor to do in the scenario? Keep your finger on the rebalancing button, for starters, and take advantage of the current dislocation between equity and fixed income markets. 

Innovation and communication are also important. Having the willingness to allocate to asset classes such as currencies and managed futures, with the objective of adding return while reducing overall volatility, will go a long way toward showing clients that unusual circumstances may require unusual and creative portfolio solutions. 

As mere stewards of wealth, we cannot control the direction of the markets. But we can communicate more, allocate more intelligently, and do what we can to prevent another “lost decade” of investing opportunities from occurring.

 

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