Investors are experiencing the true meaning of patience. With such a deep recession, investors appear to understand the need to “wait and see” as the global news of the day evolves. The daily news continues to offer a smorgasbord of turbulent financial events, prompting investors to voice concerns, but one only needs to recall the extreme lows of February 2009 to recognize that the economic backdrop, albeit unsteady, is much improved.
In a recent Wall Street Journal survey of economists, on average, the 53 respondents to the Journal’s monthly survey reported that they still expect the U.S. economy to grow about 3% in the second half of the year and to continue at that pace into 2011. These numbers, according to the survey, equate to a 9.7% unemployment current rate moving down to 8.6% by the end of 2011. The top two concerns from the respondents was that the second half of the year would see ripple effects from the European debt crisis, and that the pace of job growth could slow enough to keep the economy at an even slower growth rate.
Who could blame investors for feeling the stinging memories of the market crash? The crash left virtually no asset class untouched and little comfort was offered by money market accounts. Moving forward, we agree with the patient approach, but we certainly do not subscribe to market timing. Our clients know that our cornerstone philosophy is represented by asset allocation, which is just the opposite of market timing.
At issue with most investors is where investment assets should be placed, while minimizing risk. Some investors have turned to hedge funds, but the recent market collapse has taught many investors not to place assets into funds that are not fully disclosed and easily comprehended. Other investors have resorted to day trading, but all that this has done to the individual investor is make the market extremely volatile, thus the extreme market swings that we have seen in recent weeks.
The current market has many investors thinking about capital preservation rather than anything else. When thinking about capital preservation, it is our advice to consider a balance between risk and growth. This can be accomplished by spreading assets across many asset classes, while at the same time measuring the reward expected for the risk taken.
Avoiding moving into “the stock of the day” or by resisting buying into companies with possibly a good product but a poor balance sheet is all part of the discipline included in proper structure while developing a profitable portfolio. To be clear, asset allocation is not the cure-all to avoiding downturns in the markets, but one might expect that with enough diversification future corrections might be less painful. Even in a sustained correction we see opportunities to make good long-term investments. For example, many stocks have been oversold simply due to investor nervousness, but some of these companies offer an opportunity. At this juncture we suggest that equity investors with long term views take advantage of stock with healthy dividends and the ability to grow. Some well known companies with a good dividend record are now offering dividend yields at a 3%-4% spread above money market funds.
And finally, the investment planning process should be ongoing, not one that is set in place and left alone, with the long-term approach being the backdrop, but leaving open the review process to adjust portfolios as situations dictate. One area of concern which investors should carefully review with their investment advisor, in conjunction with their tax planner, is the possibility of a significant capital gains tax increase in 2011. Investors with large holdings in legacy type stocks might want to consider selling those shares in the current tax year in an effort to avoid higher taxes next year.
Our guest columnist comes to us this quarter with a very timely and appropriate message. We hope that you will both enjoy and benefit from her wisdom.
Clinical psychologist and executive coach Dr. Denise P. Federer is the founder and principal of Federer Performance Management Group, LLC. She brings more than 20 years experience as a clinician, researcher, speaker and consultant to her work as a performance coach.
We invite you to visit Dr. Federer’s website at
http://www.fpmg.info/default.asp
Fostering a Deeper Relationship with Your Financial Advisor-The key to increasing Client Resiliency
Have you shared with your financial advisor the milestones of your life, your priorities and financial fears? Could your financial advisor have predicted your reactions to the economic situation these past 18 months? In order to effectively guide clients through a crisis of this magnitude and help them recreate a solid financial future, financial advisors must first understand how their clients react emotionally in everyday life. This can only be achieved through more meaningful conversations and fostering a deeper relationship with your advisor.
When faced with obstacles to their goals, some individuals are able to recreate their future financial vision, while others simply shut down, become pessimistic and have difficulty making decisions. It's during these life-defining events that clients most need the help of a financial professional in taking control of their financial future.
The key to predicting an individual's ability to cope and function during extremely stressful times is the level of resiliency they possess. Resiliency or hardiness is the much-needed ability to remain in control, focused and committed when faced with challenging circumstances.
Enhancing Client Resiliency
You can foster your resiliency skills by encouraging your advisor to have deeper conversations with you to discuss your life, values and priorities. Specifically you can be open to the following interactions with your financial advisors and allow them to:
Help you tolerate your anxieties by identifying your irrational thinking and diffusing fears with alternative rational statements;
Encourage action in spite of negative feelings. Behavior is easier to change than feelings. If you wait until you feel better, you may wait a long time and miss important windows of opportunity;
Reset goals and establish priorities;
Project into the future and try to anticipate the impact of the present choices;
Discriminate and help you make choices consistent with goals and values;
Recognize that life events create an opportunity for both positive change and anxiety. Allow your advisors to help you adapt your thinking and commit to increasing your “hardiness" in order to minimize the level of disruption in their ability to function effectively.
Redefining Your Relationship with Your Advisor
In redefining your relationship most clients need their financial advisor to not only be the financial expert, but also to help reduce their financial anxiety by offering them support, information, reassurance and guidance. However, the danger in any relationship where someone is dependent upon another is in not having appropriate boundaries.
You want to allow your advisor to navigate you through difficult times, but not assume responsibility for your decisions, or events that are out of your control. It is your responsibility to educate yourself and take appropriate control of your own financial future.
By clearly defining your mutual client/advisor behavioral expectations, you will not only become more resilient, but also solidify your relationship and role with your trusted financial advisor during emotionally and financially difficult times.
Denise Federer is a clinical psychologist, executive coach and founder of Federer Performance Management Group. She has been a consultant to the financial industry for 25 years.
