When a client nervously rang financial advisor Jonathan DeYoe about how the European sovereign debt crisis would affect his $750,000 portfolio last month, DeYoe calmed his client's fears with reminders that his portfolio's overall risk had already been reduced.
"My client was listening to NPR radio reports and CNBC television segments that said the world is falling apart," said DeYoe. "He's worried about China's hard landing as well as whether Greece leaving the European Union will change his portfolio because he wants to retire in two years."
Anxiety-ridden phone calls and e-mails became so frequent from clients that DeYoe implemented a quarterly and topical seminar series to address their growing concerns.
"People are most hysterical about the political environment. I tell clients to separate politics from their economics," said DeYoe who has $75 million in assets under management at DeYoe Wealth Management in Berkeley, Calif. "A discussion about Greece, China and the global economy have been part of every quarterly and topical seminar since I started hosting them 18 months ago."
The global economy isn't as bad as the media would have consumers believe, according to MFS Investment Management's Mid-Year Investment Outlook.
"Europe is in a recession already. That I won't deny. The question is how bad a recession. Our view is it's nothing like Lehman Brothers. Experts on television are saying the problem is too much debt. That is not the problem," said MFS' Chief Investment Strategist James Swanson, who referred to Financial Services Firm Lehman Brothers being acquired by Barclays after filing for Chapter 11 bankruptcy protection on September 15, 2008.
In truth, Europe's problems are not fixed, but bandaged enough to allow business recovery in 2012. The U.S. economy remains a bright spot and investors can find returns and/or income in tech and dividend-paying stocks, according to MFS.
"The opportunity for financial advisors is to de-hysterify some of the reports we hear that we're at the end of the world as we know it; that this is all unsustainable and is going to come crashing down and that the crash is going to be worse than Lehman Brothers. We've heard this before and the underlying numbers don't suggest it's going to happen," Swanson said during a conference call on Monday.
Swanson suggested financial advisors look to S&P 500 companies that pay dividends for clients who don't trust the stock market.
"The dividend yield on the market is not at a record high, but the cash flow that backs up that dividend yield is at a record high. So, going for a dividend strategy backed by sustainable cash flow may be one thing for investors to look at," Swanson told Financial Advisor magazine during a Q&A following the conference call. "The compounding of those dividends over time is a powerful tool."
Washington Square Capital Financial Advisor Louis Berger uses the S&P 500's Dividend Aristrocrat Index to select the best dividend paying stocks for his clients.
"If you're not in constant contact with your clients, you run into hysteria. The client feels they are not in control and that they are at the mercy of the wind, so we choose stocks that have a track record of paying dividends," said Berger, who manages $20 million in assets.
The Dividend Aristocrat Index tracks companies that have increased or maintained their dividend payouts over 25 years.
There are risks that come along with focusing on dividends, Berger noted.
"If the investor needs cash flow for retirement or additional income, then dividend strategy can be good. But dividends can be cut by the board unlike a bond that's backed by an asset," Berger said. "A lot of companies cut dividends when tough times hits, such as banks and financial companies but companies in the Dividend Aristocrat index are well managed and have cash flow."
After the 2008 financial collapse, advisor Jimmy Lee noticed the mindset of even his wealthiest clients had dramatically changed.
"We try to manage expectations so that our clients do not deviate from emotions created by watching television. We've had several clients want to get out of their current investment plan as a result of media hype. Instead, we calm them down and get them refocused on their financial goals," said Lee, who has implemented quarterly portfolio reviews rather than annual reviews.
Lee also integrates a hedging strategy into his clients' portfolios to manage risk. Lee's hedging program includes short-term, money-market mutual fund positions, long/short mutual funds and long/short separate account money managers.
"We explain to our clients that their portfolio includes a hedging program based on technical analysis that protects against large declines," saidLee, whose Strategic Wealth Associates in Las Vegas manages $1 billion. "Although you're giving up upside potential to protect capital, the hedging program makes the portfolio less volatile and the beta and standard deviation decreases dramatically."
Some advisors have taken traditional psychology classes to help them handle clients who are increasingly hysterical as the November U.S. presidential election rhetoric intensifies.
"At the end of the day, finance professionals are part-time therapists for their clients," said Paul Puckett, a Virginia Beach-based financial advisor with 1st Quadrant who is also a member of the Financial Therapy Association and author of the book Investophobia: You Can Invest Without Fear!. "Most of my newer clients who panic have a sense of impending doom. I ask them to tell me about the news they saw or read and then I explore their fears. I empathize and put it in perspective for them."