If some weeks it feels like your office's reception area is like a battlefield hospital filled with a wounded army of shell-shocked investors vying for your attention, you're not alone. With many portfolios halved by a bear market still flexing its muscles, advisors across the country report an influx of investors are beating a path to their doors, many with ragged portfolios in tow. Not surprisingly, they're looking for any help they can find.
Their goal is to recoup their losses in what feels like a parallel universe where the rules of investing are shifting faster than quicksand.
Aggravating the problem-beyond the free fall that has shrunk stock market performance by more than 40% in the past three years-are investors themselves. "Many are victims of their most recent investment experience," says David Bugen of RegentAtlantic Capital in Chatham, N.J. For many investors the experience shaping their current response has been extreme. In the past decade, some experienced nearly instant wealth only to see it disappear, in some cases even more quickly than it had been produced. Even slow and steady investors were spoiled by the market's exuberance.
Which makes their recent comeuppance that much harder to take. "Boomers' experience has been: If you want to get richer, get a year older," says Milwaukee advisor Paula Hogan of Hogan Financial Management. "House prices went up, stock and bond prices went up, compensation went up, and everything got better. The unspoken rule was you always get bailed out. If the market went down, all you had to do was wait a day. The upside down lesson for many investors is: You don't always get bailed out."
At the same time, many of the investment truisms advisors have used to steer by-bonds are safe, don't time the market, stay the course, even seniors need stocks, wait for the rebound-aren't as true as they once were. The added uncertainty has sent investors scrambling for cover. For some that's meant an irrational return to technology stocks. For others, it's meant an overabundance of cash or an all-bond portfolio, even long-term bonds that expose them to potential losses. But bonds are safe, aren't they?
The good news for advisors is that some investors believe they need capable advice more than ever. Here's how some of the leading planners are using smart products, sound advice, asset allocation and advantageous tax planning to provide a strategy fit for the new reality.
Smart Products If the past three years have been bleak, the next decade is shaping up to be challenging. With the equity risk premium expected to remain lower than normal over the next ten years and long-term bonds poised to be severely undercut if interest rates start to rise, getting on track and trying to recoup losses is critical for most investors.
While most planners are reluctant to say intrinsic long-term fundamentals have changed, "we know that the reward for equity investing has changed," says Bugen, whose firm is projecting stock returns of 7% to 8% and bond returns of 4% to 6% over the next decade. "If we knew how long we were going to live, this would be easy. You don't want to oversave and be miserable now, but you don't want to be broke and old either." That's where innovation comes in. As planners seek out investments with consistent better-than-average returns and lower-than-average volatility, they may want to consider vehicles like the Hennessy Cornerstone Growth Fund. The fund has returned 58% in the past five years, clobbering the S&P's measly 3%. Recent performance has been even better. How does Neil Hennessy, who bought the fund in 1999 from James P. O'Shaughnessy, an adviser and brilliant quantitative analyst, do it? By using a disciplined, computer-based approach to look for stocks that have low price-to-sales (P/S) ratios. "We are formula driven, bound by perspective," Hennessy says. "Sticking with a formula makes you become highly disciplined and nonemotional," the manager says. The fund starts with the 10,000 stocks in the S&P's Compustat base, knocks out those with market caps below $172 million and P/S ratios above 1.5%. Stocks that failed to increase earnings in the previous year are also knocked out. Hennessy uses the formula to find the 50 stocks with the best relative strength over the preceding year, buys them, then repeats the analysis again at the end of the year. Sometimes the entire portfolio turns over, sometimes not.