Alan Haft

Helping Clients During This Financial Storm

Five top concerns and how you can ease your client’s fears.

August 15, 2011
by Alan Haft

Over the last week or so, I’ve had many calls from people understandably wanting to discuss the current market situation. Many considering selling have wisely taken into consideration tax ramifications and have mentioned needing to discuss their investments with their CPAs.

As such, during these highly volatile days, should you be getting calls to discuss these matters as well, I wanted to share with you some of the most common questions I’ve been hearing and some thoughts regarding them.

Needless to say, if someone calls me about taxes, I refer them to a CPA so if you’re not a licensed securities advisor, you obviously have to refer your clients to someone who is. But if you are getting these types of questions and clients are asking you for any sort of thoughts when addressing them with investment advisors, I thought a short list of common questions I’ve been hearing and my thoughts about them could be of some help:

  1. “Can it get much worse?”

    I’ve heard various iterations of the above and as most people know, it certainly can.

    If we are indeed about to jump into another recession (many think we never left the most recent one), then this time around, governments around the world don’t have the same ammunition at their disposal to help prop things up as they did during the last bad turn of ’08.

    Trillions have been pumped into the global economy, growth, jobs and spending are highly problematic, housing and construction starts are at an all-time low and interest rates are still basically at zero.

    Yes. It can most definitely get much worse, but that doesn’t mean one should just bail.
  2. “Should I sell all my stocks?”

    If someone is expressing this question, they are either:

    • Not properly diversified,
    • Don’t completely understand their investments,
    • Think the world is coming to an end or most likely of all,
    • They are too overexposed to stocks
    As a general rule, you might want to remind clients of the Rule of 100 that states someone should subtract their age from one hundred and the result is the maximum percentage their money should be exposed to stocks.

    A 70-year-old should therefore have no more than 30 percent exposure to stocks whereas a 30-year-old should have around 70 percent. As always, this is just a general guideline and it obviously will vary depending on your client’s particular situation and needs.

    Good or bad times, it’s always the right time to re-evaluate whether or not your client’s house of money can withstand the next coming quake.
  3. “Should I sell my bonds?”

    I had a client who wanted to sell every bond position she owned. When I reminded her she was in short-term municipal bonds and muni-bond funds of high-credit quality, she realized selling out was probably not in her best interest by any means, especially since she was supplementing her income from the interest.

    Importantly, you may want to nudge your clients to double check the credit quality and especially the length of their bonds. Long-term bonds are not a great place to be in a potentially rising rate environment, but absent of default, worst case is that the values may go down but as long as your client holds to maturity, they will collect interest payments along the way and get their money back.

    On the contrary, bond funds could fare worse due to the fact there’s no maturities for a fund investor. Should interest rates rise, the value of funds will likely fall and should that happen, a client has no idea when they are getting their principal back.

    In the case of funds, a client should check something called duration at resources such as Morningstar. The greater the duration, the greater the exposure they have to losses, should rates rise.

    Remember: Interest rates and values of bonds move in opposite directions and the longer the length of a bond, the more its value can be expected to fall. Generally speaking, duration is often construed to represent the percentage of loss that will occur for every one percent interest rates rise.

    As an example, a fund with an average duration of five years would be expected to fall around five percent for every one percent interest rates rise. The shorter the duration, the less exposure one has to loss and although investing is hardly a science, duration is a general guideline that could help measure some of the exposure one has when investing in funds.
  4. Is there anything safe out there?”

    Here’s my go-to short list that comes to mind:

    Federal Deposit Insurance Corporation (FDIC) insured CDs or Money Markets. Stemming from ’08 when the Primary Reserve Fund “broke the buck” and showed a three-cent-per-share loss, some people were even fearing these accounts. For those questioning whether the government can really back up the FDIC insurance, I respond with something to the effect of, “if FDIC fails, at that point in time, there’s a decent chance you will have a lot more to worry about other than your money.”

    Short term, multistate general obligation muni bond funds. Historically, less than one percent of muni bonds have ever failed, but certainly, these are unprecedented times. All the more the reason to stay away from revenue bonds and stick with general obligation bonds given they are backed by government’s ability to tax and that’s one thing we can be sure is never going away.

    Treasury Funds. While it’s quite true the U.S. government isn’t in superior shape, as someone on CNBC said the other day, “in the world of dirty laundry, the USA still has the cleanest shirt.”
  5. Where should I invest during these times?”

    Especially during downturns or troubled times, for my own investments, I tend to focus on individual stocks that give me better control than funds.

    With some exception, individual stocks I tend to consider during these turbulent days ideally have all of the following ingredients:

    Deep cash reserves: If rates rise, companies with deep pockets likely won’t have to borrow at higher rates that would adversely affect their bottom lines.

    Multinational companies: Investing in a U.S. company with a high degree of revenue coming from overseas gives an investor the ability to gain exposure to international currencies that could help hedge against a depreciating dollar.

    Dividend paying: If the markets continue this wild rollercoaster ride, an attractive dividend could really help buffer some of the damage and the desire to sell. Be sure to check dividend histories. If there have been significant gaps and/or dividend cuts, that’s obviously not a great sign.

    Highest possible quality: blue chip, blue chip, blue chip. Stay with companies that have been around for a long time.

As always, whether one sells out, buys gold or searches for the bargains greatly depends on their individual goals, so please don’t take any of the above as gospel by any means.

That said, I do hope some of the above can be of help.

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Alan Haft is an investment advisor, author of three books including the national bestseller, You Can Never Be Too Rich and makes frequent appearances in national print, television and radio media such as The Wall Street Journal, Money magazine, CNBC, BusinessWeek and many others.

For full disclosure, Haft is a part of a firm that utilizes all industries which typically includes us receiving percentage based fees for brokerage services as well as commissions when implementing insurance based plans. Haft does not work for any particular financial company or industry nor should this column be construed as an endorsement or condemnation for any particular product. Readers should note that all views and vendor recommendations as expressed in this article are solely the author’s and do not necessarily reflect the views of the AICPA CPA Insider™ or the AICPA.

* This article is not intended to provide financial planning, tax or legal advice and should not be relied upon as such. Any specific tax or legal questions concerning the matters described in this article should be discussed with your tax or legal advisor.