By Sarah Morgan
After a record rally last month, the Dow has fallen nearly 600 points in two days, leaving many financial pros fielding an obvious question from panicked clients: Is it time to get out?
In the past, most advisers would encourage investors to sit tight. But a growing number of advisers and planners are dealing with market swings differently than in the past, telling clients they can’t simply “buy and hold” stocks anymore. Indeed a recent survey by insurer found that more than three-fourths of advisers are now using so-called tactical strategies, making more short-term moves in response to changing markets.
And many advisers say the recent decline in stocks – the Dow shed more than 2% at the market’s open today, following a similar decline Monday as Greece’s call for a voter referendum threw the new European debt deal in jeopardy – calls for some fast rejiggering of portfolios. Tom Samuels, a managing partner at advisory firm Palantir Capital, says his firm has taken up to 40% of some clients’ portfolios out of long-term positions in stocks and bonds that are highly correlated to market indexes and put that money to work in short-term trades in stock indexes, currencies, commodities, and other asset classes. Samuels says the firm will likely continue to make tactical moves until “the waters clear” or stocks get significantly cheaper, Samuels says.
Of course, making shorter-term bets time can backfire. Many studies have shown that most investors who try it, including professionals, end up making the wrong moves at the wrong time. For example, research by Morningstar found that mutual funds that used a tactical approach underperformed a stable 60-40 portfolio of stocks and bonds, in part because they tended to miss out on early gains when markets turned positive.
As a result, some investing pros are keeping their tactical moves to a minimum. Paul Nolte, the managing director of advisory firm Dearborn Partners, says that he bought some stocks for clients in October – and will probably take gains now – but he has been limiting such tweaks to 5% of their portfolios. And since bonds had outperformed stocks for six consecutive months before October, he’s waiting before committing more heavily to stocks. “Patience is a virtue in this type of market,” he says.