When War Events Sway Your Clients Investment Strategy

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Now that the United States is at war, many financial advisors find themselves having to respond to clients who are itching to get back into the suddenly skyrocketing stock market. What kind of advice are they giving their clients?

These types of gains always attract attention from individual investors, says James Jacobs, a financial planner with Jacobs Financial Group, Chesterfield, Va.

When the market is on the rise many individual investors start thinking about shifting their assets back into stocks, whether theyre in mutual funds, variable annuities or individual investments. “I know there are people out there probably saying, Its time to get back in,” says Charles Petrizzo, national sales manager, Wachovia Insurance-Annuities, Charlotte, N.C.

However, just as quickly as the markets rose, a reaction set in after a weekend of casualties, Americans taken as prisoners and doubts about the speedy regime change in Iraq. The second week of the war saw the market off precipitously with the Dow dropping over 200 points in the first hour of trading on March 24, and closing down 307 points for the day.

This raises a timely question: Should investors be making investment decisions based on current events in the Middle East?

David Bryant, a registered representative with Farmers Financial Solutions, Tulsa, Okla., doesnt think so. He says investors trying to time the market based on the progress of the war do so at their own peril. “I am staying away from what I feel is an alarmist approach to a single event in time,” he says.

Bryant feels these daily events with the war will not have much impact on his clients long-term planning 15 years down the road.

Yet, in an interactive poll taken in last months Registered E-Report, an electronic newsletter published by National Underwriter, more than 80% of registered representatives who responded felt it was suitable to discuss the war in Iraq and its impact on clients investments. Only about 7% of registered reps participating felt it was not a suitable topic for discussion.

“I wouldnt be speaking [to clients] based on the progress of the war, I would be speaking based on what the market has been over the last three years,” says Jacobs.

Bryant says hes had a number of clients call in the last week and all of them were trying to make a few strategic moves to capitalize on the volatility caused by the war. “I had one client call who said Ive heard the biggest money is made in the first 21 days of a war,” Bryant says.

One client Bryant spoke with said he had $5,000 to invest. “If we double your money,” he said to his client, “thats a great thing, but youre only talking about $10,000. Its not going to change your long-term planning.”

Historically, Jacobs recalls, anytime there is a war the market goes up. During the buildup for the Gulf War in 1990, the market dropped, he explains, but then after the military campaign in 1991, there were substantial stock market gains.

But even with the recent market run-up, some observers have their own theories about what was behind it. Some attribute these initial stock market gains to the activity of institutional investors, rather than individuals getting back into the market.

According to one stockbroker with whom National Underwriter spoke, when war broke out many institutional investors decided to lock in gains from their short positions. “Thats probably the number one thing that was driving the market up,” says a representative with Ryan Beck and Company, Livingston, N.J., who asked not to be identified.

Despite the history of the market, and a few calls from investors last week, Jacobs notes that the majority of his clients are “still scared to death to get back into the market.”

For Jeffrey West, a financial advisor with the Cohen Financial Group, Framingham, Mass., many of his clients are concerned the war will take place on U.S. soil. “Weve never had a historical pattern for that.”

West feels that a terrorist attack in the United States would have significant impact on the market “that will bring it back down to new lows.”

Bryant feels that clients watching the war every day need to stick to fundamental investment strategies for long-term planning. While the war may cause some additional volatility, “it should not change the foundation of a long-term strategy,” he says.

Petrizzo admits that even he was tempted to play the market swings. “Imagine if they got Saddam and bin Laden on the same day–what that would do for the market,” he says. But when people start itching to time the market, Petrizzo says its the brokers role to act as an emotional gatekeeper. “The broker keeps your emotions in check,” he says.

According to Petrizzo, these investors need to take a step back, understand the war is going to have an impact and create some volatility but to stick with their plan.

Bryant agrees. “The fundamentals of the market are still there, timeframes are still there. I dont think you can have this reactive investing when youre looking long term.”


Reproduced from National Underwriter Edition, March 31, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved. Copyright in this article as an independent work may be held by the author.