Don’t let the stock market’s comeback fool you, money managers say there still is a lot of wealth sitting on the sidelines due to a crisis of confidence in institutions like Wall Street and especially Congress.
The stock market hit a low of just above 7,000 in early 2009, losing nearly half its value in a two-year period, but it has steadily climbed back toward pre-recession levels despite boondoggles, recession, bailouts, and mounting government debt.
Financial planner Tom Carroll, senior vice president and branch manager for Robert Baird & Co. in Madison, and Joan Burke, president of First Business Trust & Investments, represent wealth management organizations that aren’t too big to fail and that rejected the risky products that were symbolic of the now discredited “financial supermarket” model. As the economy struggles to gain some footing, they hope to bolster investor confidence through education, stock market history lessons, and timely due diligence.
They have their work cut out for them because the economic events of the past two years have turned some investors into savers — people who are more concerned with wealth preservation than with making their money work in the market. In 2009, more money flowed into fixed income or bond mutual funds than into stocks, and this occurred in a year when the stock market recaptured its previous momentum.
“I think any time you have a crisis of those proportions, and a crisis of confidence, people are going to be scared to the sidelines and whatever the perceived safe havens are,” Carroll said.
Psychological Booster Shot
According to Carroll, money that’s in the equity markets should never be short-term money, it should never be weak-handed money, and it should never be borrowed money. It should be serious, long-term money, but right now it’s not easy to get people to take the long view and commit more money to an equity portfolio.
Still, not every wealth manager is thinking about retrenching. Baird, which perennially makes Fortune magazine’s list of the “100 Best Companies to Work For,” has two Madison offices and has added eight local wealth management professionals since mid 2009. The firm recently held a client event that drew about 90 people, not necessarily to sell anything but to put a premium on investor education. “We brought in a bond manager,” Carroll said. “In fact, we brought in Madison Investment Advisors and talked about the difficulty in getting yield right now, which is what investors are trying to do when they buy bonds and CDs, and we also talked about the need for equities in a long-term portfolio.
“We’re not telling our clients anything new. What they need is reassurance. They need to be reminded of long-term strategies.”
According to Burke, those reminders are starting to convince would-be investors to dip their toes in the water. While economic headwinds persist, the national economy expanded in the third and fourth quarters of 2009, and Burke indicated that in the first three months of 2010, more people are taking those first hesitant steps toward putting more skin in the game.
“We’ve had, from an anecdotal standpoint, the clients that we work with or the prospects that we work with, come in and want to sit down and talk about what they should do now,” Burke said. “They say, ‘I’ve been so conservative. I’ve left money sitting in a money market or a short-term CD. Should I still wait and leave my money earning 1.0 or 1.5%, or should I be doing something else?’
“So yes, we have seen clients come out of their shell a little bit and at least ask for some additional direction.”
That direction could include a risk-tolerance investigation that does not commit money, but involves a good deal of number crunching. According to Burke, the first thing money managers should do is make sure prospective clients truly are investors, as opposed to savers, because investing involves taking on a component of risk.
If they are indeed an investor, a wealth manager must crunch some numbers to help them quantify how much risk they can take. “We do it basically looking at their financials, looking at their cash flows, looking at what their expenditures are, and their sources and uses of funds,” Burke explained, “and by saying, ‘this is what you need to live off of, this is what your life expectancy is, this is what your other plans are for gifting or inheritance, and this is where you’re at presently.’
“And then we try to quantify that, and the best way you can do that, and frankly the only way you can do that, is by looking at history,” she added. “What have different types of investments done, or how have they performed in the past?”
Worst-case scenarios are part of the calculation. “We can say that if you went through another worst type equity market, like we went through in 2008 and early ’09, what would that mean? How would that impact you? We can certainly give them a worst-case scenario, and then varying degrees of that.
“So if you weren’t 100% exposed to that environment, but you were 40% or 50% or 60% exposed, what would your numbers have looked like, and how would that have impacted you?”
This hypothetical, numbers-based exercise is important, Burke said, because one of the most difficult aspects of a money manager’s job is to evaluate a client’s emotional ability to assume risk and get back into the market at some level. “That is only something that they can gauge,” she stated, based on the numbers.
Carroll and Burke agree that it will take more than pointing to the long, upward trajectory of the stock market to convince people to get off the sidelines. “You don’t try to sell people on that [long-term trend],” Carroll stated. “You try to find what’s right for them. Your attitude toward investing is going to be different than your mother’s, but what if I said to both of you, ‘Do you think that businesses like 3M, Madison Gas & Electric, and IBM will grow in the next 30 years?'”
If the answer is yes, his next suggestion would be to consider putting some percentage of your investible dollars into a portfolio of companies. The exact percentage will be dictated by individual risk tolerance. Your tolerance might be 40% of your long-term money; your mother’s might be 10%.
Investment Profile
Today’s reluctant investor does not fit a specific profile, but they do share some characteristics. They tend to be people who have been accomplished in their field of work, and usually they are beyond 55 years of age and face a diminishing time horizon for replenishing funds. “It’s not limited to a certain profession or walk of life,” Burke said. “It’s not female or male, it’s across the board.”
While there is some guess work involved, Carroll believes saving and investing is a very simple business. “You remind your clients to live within their means, save part of their earnings on a regular basis and then, on a long-term basis, start investing in businesses,” he said, “and that’s about owning stock.”
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