Talking with your clients about investment strategies may not be easy given the current economic climate, but preparation and ongoing assessment of an investor's portfolio are the keys to restoring confidence.Money managers agree that mutual funds continue to be a strong investment vehicle, offering investors a number of options for accessing the market - that is, if they stick with their investment strategy.
"Most of my clients now are scared and still concerned if you mention the word equity," said Tom Roche, a CPA and partner at Fazio, Mannuzza, Roche, Tankel, LaPilusa LLC in Springfield, N.J. "The No. 1 thing that people say is, 'I haven't looked at my statements. I haven't had the guts to open them in the last few months.' A lot of people don't even want to talk about it now."
Roche, who offers wealth management through FMRTD Financial Resources LLC, said that he's still been using mutual funds quite often within his clients' portfolios because of the diversification they offer. "We put a lot of money into money markets over the last year because we were hesitant to be investing in equities or bonds," he said, while adding that he would re-adjust his clients' investments over the next few months. "Everything has been down across the board."
Mutual funds are composed of individual securities, so it makes sense that their returns are reflective of what's going on in the market, according to Philip Brice, principal of Elliott Davis Investment Partners in Greenville, S.C. When investors begin pulling money out of funds, it could put added selling pressure on the fund manager in the short run at times when they may not want to sell a particular security.
Nevertheless, mutual funds are a great way for investors to access various segments of the market, Brice said. He suggested creating a blended portfolio of mutual funds and exchange-traded funds that represent various asset classes such as growth, value, large cap, small cap and international, and that complement, rather than overlap, each other. ETFs are traded investment vehicles that hold a "basket" of stocks or bonds and trade at the approximate value of the underlying assets.
His firm has also been incorporating funds that offer alternative strategies, such as convertible bond funds that own bonds with the option to convert to equity in the underlying company. Another choice is merger arbitration funds, which specialize in M&A.
"Many new alternative strategies are available and are becoming an important part of controlling risk in the overall portfolio," Brice said. "They're also completely regulated, transparent and liquid, which in times like this is very important in monitoring results for our clients. We have a very rigid process that helps identify the best funds in each one of those categories. You want a methodology of evaluating those on a regular basis. It's important to make sure you've got good investment options up front and that they remain the best in those particular asset classes."
Michael Goodman, a CPA, CFP, PFS and president of Wealthstream Advisors Inc. in New York, said that he, too, thinks mutual funds are an effective way to get a diversified portfolio at a reasonable cost. "That hasn't changed," he said. "This extreme marketplace has given you many opportunities to argue many different points. The benefits of mutual funds are very, very much intact."
Though mutual funds are still being touted as a savvy investment vehicle, it doesn't make it easier to placate worried or fearful clients who are watching their savings disappear. However, advisors point out that during the current economic downturn, investors can snap up funds at bargain basement prices - often discounted as much as 30 to 40 percent.
OVERCOMING FEARS
"In terms of how advisors can communicate with clients, obviously it is a big challenge after last year," said Russel Kinnel, director of mutual fund research for Morningstar FundInvestor and author of Fund Spy: Morningstar's Inside Secrets to Selecting Mutual Funds that Outperform, which is due out in March. "I think what they can do is show long-term records that show you can earn a nice return, or that people have earned nice returns in the past in funds."
Kinnel said that this is a "pretty compelling time to invest" and the key to finding funds that will outperform when the market is uncertain is about having a long-term fundamental focus. "Investing in most mutual funds, certainly any equity mutual fund, is a long-term proposition, and so both the advisor and the clients have to maintain that focus and recognize that it's not about getting a great return for 2009," he said. "It's partly about having the right expectations, but also about focusing on fundamentals that over the long haul are very dependable and pay off nicely."
Solid fundamentals, according to Kinnel, include low expenses, good fund management, and good long-term performance. "The challenge is always when emotions get involved," he said. "Particularly after a tough year, there's so much fear that it keeps people from doing what the rational approach is. The goal is to buy low and sell high. The best time to buy is after a sell-off. Recognize that the reason these opportunities come up is that you get in when things aren't looking good."
Robert Doyle, a CPA, PFS and president of Doyle Wealth Management Inc. in St. Petersburg, Fla., said that he's not only a financial planner, he's a "relationship manager" to his clients - a role that sometimes includes a bit of hand-holding. "The mutual funds we are using, they are still beneficial in a bear market, just like they were beneficial in a bull market," he explained. "Their purpose has not changed. I'm reaching through the phone lines and I'm telling clients it's going to be okay, that this is not the end of the world. This is a very good opportunity, though they may not feel like it presently."
Doyle revealed that he's had some clients pull out of their current investments - which he considers normal behavior. However, he advises his clients to stick to their long-term plan, because nothing has changed except the market environment.
A common mistake investors make, according to Doyle, is selling growth mutual funds that are down 40 percent and then buying a short-term Treasury fund that is at an all-time high. "You are selling low and you are preparing yourself to lose even more money when Treasury interest rates go back up," he explained. "A lot of individual investors are becoming more conservative. They are buying bond mutual funds because of the perceived lower risk."
Michelle Smith, managing director of the Kansas City, Mo.-based Mutual Fund Education Alliance, a national trade association of mutual fund companies whose members are responsible for nearly $6 trillion in mutual fund investments, said that investing should happen consistently and constantly if - and only if - people have a cash reserve set aside to cover any unexpected financial burdens. Once that reserve is in place, people should invest at a dollar cost average or within an automatic investment plan - or a program that allows you to invest a certain amount of money every month. Many mutual fund companies, she said, will forgo their minimum investment requirement if an investor sets up an automatic plan.
Though she noted that it's scary to invest right now, she reiterated what most financial experts are advising - don't bail on the market.
"A misconception is that you are at great risk if you invest in this kind of climate," Smith said, adding that her organization has set up a private practice management Web site for mutual fund companies to discuss their investors' issues. "What many people don't realize is that things work much better when people are moving the money around. If everybody took their money to cash and did nothing it would be disastrous for our economy."
