WASHINGTON, 15 September 2003 — Any investor heading into a competent broker’s office is going to hear only one message: Diversify.
In the wake of a three-year bear market following the explosion of the technology stock bubble in 2000, investors remain keen on finding a cure for their ailing portfolios. Until recent bond-market moves, many wanted to invest only in bonds. Some believe that the only stocks worth owning are those that produce dividends, thanks to beneficial tax legislation passed in the spring. Others are flabbergasted that they must curtail spending now if they are to achieve their retirement dreams later.
“There’s a lot of people who just believe, even if they won’t say it, that you can be in all the right places at all the right times,” said UBS Wealth Management broker Rich Abrams. In short, not a lot has changed in investor attitudes since the market began its downward spiral, although there appears to be a little more humility and willingness to listen to brokers’ advice than before.
But that advice right now isn’t always what customers want to hear: That there are no quick fixes or perfect investments designed to get them rich quickly, and that their best course is to spread their investments over a broad swath of securities - domestic and foreign, small- and large-cap - to minimize downside.
“I say, the slower the stock market recovers, the better,” said Allan Jay, a Smith Barney broker in Stamford, Conn., who, like many brokers, believes his job of giving investment advice has become somewhat easier since the tech bubble popped and dispelled the notion that Internet stocks would finance everyone’s early retirement.
Brokers like Messrs. Jay and Abrams say they were advocates of diversified portfolios long before the market fell. But there is an even greater resolve now to stick to the safety of owning a blend of broad asset diversification. One of the largest categories of complaints: Unsuitability, which equates into portfolios that weren’t diverse enough and took on too much risk through sector bets or concentration in a few highflying stocks.
“Some clients say, `Is that all we’re going to do?’ “ said Margaret Starner, a Raymond James broker in Miami, who spends a large chunk of her time reassuring clients that they shouldn’t necessarily be trying to beat an index’s performance with high-octane investments. “People don’t understand that their portfolio doesn’t have to go up every day for years. Their benchmark should be, ‘Do you have enough when you need it?’ ” she said.
Robert Fragasso, with independent firm Fragasso Group in Pittsburgh, said he counters investors’ innate need for portfolio excitement by having a built-in system of indoctrination about asset allocation. He runs an adult-education program about investing at the University of Pittsburgh, and his clients either come to him after being his students, or he tells new nonstudent clients to sign up for the class.
“We really strongly encourage those who aren’t students to come to the classes, so that our clients end up early on being well educated,” said Mr. Fragasso.
That said, there has been some fine-tuning going on in customers’ accounts over the past six months as brokers encouraged their clients to prepare for the stock market to recover and bond prices to fall.
Ms. Starner likes the income that is generated by some real-estate investment trusts, or REITs, which still have a higher return than most bonds. On the other hand, Fragasso said he’s encouraging clients to exit REITs, which he feels are oversold.
Smith Barney’s Jay has encouraged some clients to invest in managed futures, a professionally managed account or fund in which money managers trade futures and forward contracts, because they don’t correlate with the movements of the stock market. But because of their volatility, they aren’t appropriate investments for every investor, and the percentages that are allocated to different clients’ portfolios - between 5 percent and 10 percent - depend upon their tolerance for risk, he said.
