Many advisers don't believe that the market has bottomed, even though the Dow Jones Industrial Average rallied for four days last week.
Many advisers don't believe that the market has bottomed, even though the Dow Jones Industrial Average rallied for four days last week.
"We may see a 20% or 30% pop in the indexes" in the next three to four months, but it will be short-lived, said Don Schreiber, president and chief executive of WBI Investments in Little Silver, N.J., which manages about $300 million in assets.
Indeed, many financial advisers feel that last week's rally was a psychological one, triggered by investor optimism about the government's stimulus program, news that Citigroup Inc. of New York is poised to post a profit, talk of possible changes to the fair-value-accounting system and other market chatter.
"People were reacting to the market news," said Dean Barber, president of Barber Financial Group Inc. in Lenexa, Kan., which manages about $700 million in assets. "I don't think it's anything that's going to last."
"I don't think anyone has any confidence in what's going on right now," said Bob Stone, founder of Telemus Capital Partners LLC in Southfield, Mich., which manages more than $3 billion in assets. "[Treasury Secretary] Tim Geithner is nowhere to be seen — we joke that he's been put in the witness protection program, because we haven't seen him much."
A recent poll by InvestmentNews showed advisers believed that the Dow could drop considerably further before hitting bottom, with 38% of the 624 respondents believing that it would dip below 6,500 before leveling off. About 31% indicated that the Dow would bottom between 6,500 and 7,000 in 2009, and 22% predicted a bottom between 6,001 and 6,500. Meanwhile, the most pessimistic responses came from the 8% who saw a trough between 5,501 and 6,000, and 8% who predicted that the Dow would fall even below 5,500.
The continuing uncertainty has caused many financial advisers, who months ago abandoned a long-standing "buy-and-hold" mantra, to adjust their strategies and allocations. "This is unchartered territory," Mr. Stone said. "We've gotten a lot more conservative in our investment approach."
Many financial advisers and planners began shifting their clients' portfolios out of equities and into cash, bonds and inverse investments in early 2008. Inverse investments refer to strategies that bet against the market, such as inverse mutual funds and inverse exchange traded funds that short the market, and to niches such as gold that tend to outperform in down markets.
However, advisers are mixed over whether to start moving back into stocks now. Mr. Barber has allocated between 75% and 85% of his clients' portfolios in cash and short-term bonds since November 2008 — a big change from his 2007 portfolio, which was 60% equities, 20% inflation-protected Treasuries and 20% cash. Despite last week's rally, he has no plans to jump back into equities in a big way.
Mr. Stone boosted his cash allocation to 40%, from 10%, and exited his alternative-investments strategy following the meltdown of New York-based Lehman Brothers Holding Inc. in 2008. Today, his portfolio is about 26% cash, 19% equities, 19% fixed income, 5% global fund, 18% inverse investments that short the Standard & Poor's 500 stock index and short 20-year Treasuries, and the remainder in precious metals and commodities.
Mr. Stone also has no intention of boosting his equity allocation now. "I'm not convinced we're at the bottom yet," he said. "We think the credit markets need to recover before the equity markets can recover."
However, Marne DeSantis, a principal at West Chester (Pa.) Capital, sees signs that the market may be approaching a bottom: Housing affordability is at a 30-year high, many companies are trading below their book value or liquidating value, the S&P 500's dividend yield exceeds 4%, and historic low interest rates make the cost of money cheap — all events that historically have preceded market bottoms.
Mr. DeSantis, who manages $120 million in assets, began moving about 20% of his clients' portfolios into cash in the fall 2007 but started moving it back into equities at the start of 2009. "We don't want to be out of the market," he said. "If you get out at the wrong time and are late getting back in, it can be a double whammy."
Currently, Mr. DeSantis allocates about 50% to equities, 10% to cash and 40% to bonds and mortgage REITs.
Nicholas Yrizarry, founder of an eponymous wealth management firm in Reston, Va., also sees opportunity in the beaten-down stock market. "In the middle of difficulty lies opportunity" for long-term investors, he said.
Mr. Yrizarry, who manages about $80 million in assets, has been practicing dollar cost averaging to purchase equities on the cheap since last summer. By the time the market rebounds, he said, clients will have accumulated a large amount of shares at a discount without having to time the bottom of the market. Mr. Yrizarry's average client is currently invested 60% in stocks and 40% in bonds and non-traded health care real estate investment trusts.
But Mr. Schreiber disagrees.
"To be fully invested and only have 5% to 10% in cash is one of the most ridiculous things I've ever heard," he said. "It's complete nonsense" to think that someone can buy and hold a security and not worry about market volatility or loss of capital on the belief that the markets will always return," Mr. Schreiber said.
Historically, market cycles last an average of about 17 years, and "we have a long way to go to get out of this one," he said. During the Great Depression, for example, the Dow peaked at 381.17 in 1929 but did not cross the 300 mark again until 1954. "Who in their right mind would hold that length of time just to get back to even?"
E-mail Janet Morrissey at jmorrissey@investmentnews.com.
