Investors setting themselves up for 'same disastrous pattern'

The average investor is still far too heavily weighted in fixed-income securities. Or at least, that's the opinion of Mark Matson, an investment adviser who manages just under $3 billion in assets for more than 14,000 individual investors. Mr. Matson conducts “MRIs” of the portfolios of prospective clients for a small fee and found that large numbers of them had shifted their money into cash and fixed-income assets. “I suspected they would be heavy in cash, but not to this degree,” he said. In a recent study of the portfolios of over 10,000 of these prospective clients, Mr. Matson found that the average investor had about 70% of his or her assets in cash and fixed-income securities. That compares to about a 20% allocation to fixed income four years ago. “Investors right now are doing the complete opposite of what they are supposed to do,” Mr. Matson said. “To be a successful investor, you have to have the foresight to do the opposite of the herd. This mentality of safety in numbers doesn't work in investing.” With yields at or near all-time lows, Mr. Matson said fixed-income securities are at peak value and vulnerable to a fall — if and when interest rates begin to rise. The stampede into debt securities illustrates the fear that is motivating many investors. And the ultimate outcome will be unpleasant, he said. “Investors overweighted equities when they were hot, panicked when they crashed and are still sitting on the sideline,” Mr. Matson said. “They bought high, sold low and most won't get back in until the market returns to all-time highs, repeating the same disastrous pattern.” He says his existing clients, on the other hand, are committed to their long-term asset allocations. His average client was about 70% invested in equities before the financial crisis and is about 70% in equities now. “Investing is simple. You pick the long-term allocations you're comfortable with and you re-balance the portfolio consistently to keep your desired mix,” Mr. Matson said. Mr. Matson is so committed to his investing principles that he fired 300 clients last year for what he calls “dysfunctional investing.” “It's our job to stop dysfunctional investors,” he said. “When a client says they want to go to cash, it's my job as their coach to keep them from acting irrationally. I won't be part of a dysfunctional process.”