Fear-Crazed, Free-Range Clients

September 6, 2011

It’s tough to struggle with the fears of clients, one of the toughest things any advisor has to do.  On the other hand, it may be the most valuable thing an advisor can do for clients.  Investors without advisors to guide them, it seems, are likely to be far worse off.  Investment News has an article discussing the findings of investment advisor Mark Matson:

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.”

Even given the scary market for the last few years, I find his numbers shocking!  These prospective, free-range clients had 70% of their assets in cash and bonds!  Most clients of reasonable advisors are still probably pretty close to whatever their policy portfolio allocation is.  True, an occasional client may panic and go off the reservation, but advisors are able to keep most of them in a more level frame of mind.

DALBAR numbers keep me up at night, and Mr. Matson found just the same thing.

“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.”

I’m sure these free-range clients think they are doing the right thing, but good investing is not emotionally reactive.  You’ve got to settle on a proven, profitable long term strategy—we happen to like systematic relative strength investing—and then lean against the emotional currents.  When you are feeling particularly fearful, perhaps you should increase your bet.  When you are feeling quite self-satisfied, it might be time to consider a little diversification.  Or you could just hire a competent advisor.

Don't be a free-range turkey!

Source: waexclusivemeats.com.au

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From the Archives: Houses versus Stocks

September 6, 2011

New York Times columnist Jeff Brown discusses the investment merits of houses versus stocks. He makes a lot of good points that clients really need to think about. Price appreciation in homes is not nearly as high as in stocks over time, homes are less liquid, and well, homes are homes. Even the help from leverage is not as great as generally believed. The only real advantage houses have is psychological–the price isn’t quoted daily.

Maybe investor behavior in the stock market would be better if prices were only quoted once a year.

—-this article originally appeared 8/14/2009.  The last few years have been a good demonstration of why houses are not investments!

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Another Record for Bonds

September 6, 2011

The trend is your friend, until it ends.  Marketbeat points out that the ten-year Treasury yield is in the 2% ballpark.

For the record, Roger Ibbotson, a professor at Yale School of Management, traces 10-year yields back to the 1920s and says the 10-year has been above 2% since April 1950. It reached its lowest point in April 1942 of 0.92%, he says.

There has not been a monthly closing yield below 2% since April 1950—wow! 

Ten Year hits 2%

Source: Yahoo! Finance

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Dorsey, Wright Client Sentiment Survey Results – 8/26/11

September 6, 2011

Our latest sentiment survey was open from 8/26/11 to 9/2/11. The Dorsey, Wright Polo Shirt Raffle continues to drive advisor participation, and we greatly appreciate your support! This round, we had 85 advisors participate in the survey. If you believe, as we do, that markets are driven by supply and demand, client behavior is important. We’re not asking what you think of the market—since most of our blog readers are financial advisors, we’re asking instead about the behavior of your clients. Then we’re aggregating responses exclusively for our readership. Your privacy will not be compromised in any way.

After the first 30 or so responses, the established pattern was simply magnified, so we are comfortable about the statistical validity of our sample. Most of the responses were from the U.S., but we also had multiple advisors respond from at least three other countries. Let’s get down to an analysis of the data! Note: You can click on any of the charts to enlarge them.

Question 1. Based on their behavior, are your clients currently more afraid of: a) getting caught in a stock market downdraft, or b) missing a stock market upturn?


Chart 1: Greatest Fear.  From survey to survey, the S&P was basically flat, and the fear numbers remained mostly the same.  Fear levels dropped from 79% to to 78%, while opportunity levels rose from 21% to 22%.  After an ugly summer, it seems as though clients are in a “wait and see” mode with regards to sentiment.

Chart 2. Greatest Fear Spread.  Another way to look at this data is to examine the spread between the two groups.  The spread fell slightly, from 58% to 55%.

Question 2. Based on their behavior, how would you rate your clients’ current appetite for risk?

Chart 3: Average Risk Appetite.  Overall risk appetite numbers reflected the same data as the overall fear numbers, with a very quiet move lower.  This round, the overall risk number fell from 2.49 to 2.44.

Chart 4: Risk Appetite Bell Curve. This chart uses a bell curve to break out the percentage of respondents at each risk appetite level.  Low risk continues to dominate client sentiment, with nearly half of all respondents looking for a risk level of 2.

Chart 5: Risk Appetite Bell Curve by Group. The next three charts use cross-sectional data. This chart plots the reported client risk appetite separately for the fear of downdraft and for the fear of missing upturn groups.  This bar chart sorts out as we expect, with the fear group looking for low risk and the opportunity group looking for more risk.

Chart 6: Average Risk Appetite by Group.  Both camps’ risk averages fell slightly this round, as the overall fear numbers show.  Nothing to really see here, move along!

Chart 7: Risk Appetite Spread. This is a spread chart constructed from the data in Chart 6, where the average risk appetite of the downdraft group is subtracted from the average risk appetite of the missing upturn group.  The spread dipped slightly this round, but still sits above its major range over the past year.

This survey round, fear levels continued to move lower on muted market action, and the other sentiment indicators pretty much fell into line.  Like the overall fear numbers, the risk appetite average ticked slightly lower.  Despite a major drawdown over the past two months, client sentiment seems to have found itself sitting in the mid 70’s for the time being.

No one can predict the future, as we all know, so instead of prognosticating, we will sit back and enjoy the ride. A rigorously tested, systematic investment process provides a great deal of comfort for clients during these types of fearful, highly uncertain market environments. Until next time, good trading and thank you for participating.

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Weekly RS Recap

September 6, 2011

The table below shows the performance of a universe of mid and large cap U.S. equities, broken down by relative strength decile and quartile and then compared to the universe return.  Those at the top of the ranks are those stocks which have the best intermediate-term relative strength.  Relative strength strategies buy securities that have strong intermediate-term relative strength and hold them as long as they remain strong.

Last week’s performance (8/29/11 – 9/2/11) is as follows:

High relative stocks outperformed the universe last week — the top quartile outperformed the universe by 50 basis points.

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