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MUTUAL FUND QUARTERLY REPORT : FINANCIAL PLANNING

Early chill in the fall season

Sure, it's scary, but resist the impulse to flee, advisors say

October 12, 2008|Josh Friedman and Peter Y. Hong | Times Staff Writers

A major Wall Street bank crumbles. A money fund tanks. The stock market retreats to levels not seen in years.

And as investors are bombarded with scary bulletins from the financial system, financial planners are finding that their textbook advice -- "Stay the course" -- can be hard for clients to swallow.

"Every time the stock market tries to rebound, another shoe drops," said Kurt Brouwer, chairman of Brouwer & Janikowski in Tiburon, Calif. "There is a whole closet full of shoes dropping one after another."

Investor Mark Adelson sensed trouble in the stock market last month and decided to bail. The 59-year-old San Bernardino resident moved about $100,000 out of several stock funds into a corporate bond fund.

A couple of weeks later, Adelson, an engineer, decided the bonds weren't safe either, and he now has that portion of his nest egg in a money market fund.

Adelson is aware that most financial advisors advocate staying put during market downturns. But he really felt he had to do something to safeguard his retirement funds.

"I understand you can't really time the market, but I just feel uncomfortable leaving my money somewhere when I see the bottom dropping out," he said.

With banks at the center of the crisis, Americans may be more worried about their investments than at any time since the Great Depression, said Bob Smoke, president of Larkspur, Calif., planning firm Seton Smoke, which is merging with Brouwer's company.

Uncertainty about the parameters -- not to mention the ultimate effectiveness -- of the bank bailout plan being hashed out in Washington only adds to the anxiety.

"If this isn't done correctly, our whole system could come apart," Smoke said. "If banks can't lend money, we're going to have so much panic in the streets. We already have so many people out of work."

It's a natural impulse, financial planners say, for investors to want to do something at a time of crisis. So some advisors have hit upon a compromise strategy -- guide clients into new, more conservative places to park just a portion of their assets, while leaving the rest in place. That way, people can feel as if they're doing something while avoiding selling their entire portfolio at the bottom of the market.

"I'd rather have them move 10% or 20% than sell everything," said Brent Kessel, a Pacific Palisades financial planner.

For one investor, the failure of Lehman Bros. Holdings Inc. was the tipping point.

The investor, a man with less than a year to go before his retirement, had $600,000 in equities -- and he wanted out, said Irvine financial planner Victoria Collins.

Collins convinced him that by moving just a portion of his savings into a tax-free money market mutual fund he could make it through the first few years of retirement without decimating his portfolio. After all, she said, retirees won't need to use all of their money at once -- they can hold on to at least some of their investments while waiting for the market to come back, and tap just a portion in the meantime.

Making the change helped the investor feel that he was doing something -- without risking huge losses from selling his entire portfolio in a down market, said Collins, who holds a doctorate in psychology.

"Action is really the best antidote for anxiety," she said.

Rather than shift investments during downturns, Kessel believes, people are better off cutting their spending 5% to 15%. Doing so, he said, "has a huge effect on financial security. If you decrease your spending, you need a lot less to retire."

Planners also say that the bear market for stocks has, once again, demonstrated the importance of portfolio diversification. A portfolio divided among stocks, bonds, money market accounts and other investment vehicles is less likely to tank completely when one sector gets hammered.

Of course, not everyone is thinking defensively in this stock market downturn.

Some investors are looking for bargains, perhaps inspired by Warren Buffett's recent bet on banking firm Goldman Sachs Group.

Mark Wilson, vice president of planning firm Tarbox Group in Newport Beach, said he had seen some signs that stocks are undervalued -- which means that they could come back. Investors who buy undervalued stock in healthy companies now might profit when the market turns around, he said.

But for most investors, the impulse is to flee, not to buy more.

Even traditionally conservative vehicles like money market mutual funds have had trouble -- and many investors are beside themselves with worry.

"It's been so bizarre," said Rick Brooks, vice president for investment management at advisory firm Blankinship & Foster in Solana Beach, Calif.

"The question we're hearing more than any other these days is simply: 'Is my money safe?' "

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josh.friedman@latimes.com

peter.hong@latimes.com

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