Panicky Investors Making Some Bone-Headed Moves

The financial distress caused by the stock market’s wild gyrations has investors itching to DO SOMETHING.

But that’s precisely what most financial advisers are counseling against. And they believe they are mostly winning the battle against rash investments decisions.

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Still, there is no shortage of bone-headed moves that panicky investors are considering—requiring their advisers to make timely interventions.

Even otherwise savvy business people are not immune.

Earlier this week, Jeffrey Sprowles, a Philadelphia-based financial advisor, had to talk a client out of selling his Schwab money market account—in which high six-figures was deposited—to buy Treasurys.

“After I noted that he would be giving up something in excess of $50,000 per year if we followed his course of action he backed off,” Sprowles recalled.

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Strangely, the sell order came even after Sprowles had just reviewed the client’s holdings and told him that nothing was at risk.

“Although I did suggest that this kind of action was in a category of self-fulfilling prophecy [of feared losses] I successfully resisted the urge to suggest he watch “It’s A Wonderful Life,” added Sprowles.

He put out another fire when another business owner, who had been pleased with double-digit returns on her international and large cap value stocks, abruptly instructed him to liquidate and move into a mixture of gold and commodities.

So far no clients have gone off the reservation, Sprowles said. Still, TV commentary by ‘experts’ including CNBC’s Jim Cramer predicting the Dow declining below 9,000 is tough to resist,” he says.

“If the market doesn’t recover, I may have a different story to tell” about more rash moves, he added.

Marc Schindler, a fee-only financial adviser in Bellaire, Texas, says he lost one client recently when the client decided to redirect his investments into foreign currencies through CD and money market accounts offered by a Florida bank.

Knight Kiplinger advises against dumping "good stocks." Watch video at left.

The client is something of an outlier. During the one year he had an account with Schindler’s Pivot Point Advisors, the client changed his investment program three times.

In the end, he opted to go into the Australian dollars. Schindler fears that the country's commodity-driven economy will be slowing with the rest of the global economy and maybe slip into a recession.

“Any time you have some body that is going to listen to some [bank] newsletter—and not the disinterested advice of fee-only financial advisers—it’s a disaster or train wreck waiting to happen,” says Schindler.

“As always in turbulent times, we are seeing clients who want to go to cash and ‘wait it out’ then jump back in later when times are less scary,” says Elaine Scoggins, a financial advisor with Merriam Berkman Next, in Seattle, Washington. But "this I exactly how fortunes are lost."

Still, these are extraordinary times, putting financial advisers in the hot seat in ways even veterans have never experienced before.

As a result, helping clients keep their heads when so many others are losing their investment cool, is all the more challenging.

See five recommendations financial advisors have for playing the current market.

“There is no question there is higher level of anxiety that there has not been in past declines,” with clients now questioning traditionally rock-sound investment vehicles, such as bonds and money-market accounts, proxies of the financial system’s stability, says Gerard Klingman, a Manhattan financial advisor affiliated with Raymond James .

“We think some of the value-added we provide to clients is to talk them through their emotions in times like this, hopefully we provide sound investment advice, but we also provide a sounding board—I would say 98 percent of our clients are following our advice.”

The advice is to ride out the storm. Those that have deviated typically couldn’t stand the pain of declining stocks.

See CNBC poll of readers experiencing credit problems already.

Normally in a declining equities market Klingman’s strategy calls for buying more equities, more for portfolio balancing, than a market timing mechanism. But not in today's choatic environment.

“We are not doing the traditional thing of adding money to equities now based on valuations just because until this credit issue gets sort out a little bit more we are uncomfortable trying to be a hero here,” he said.

“Whatever percentage clients have in equities, we are not selling in to this kind of volatility and fear that’s happening now, we are reviewing our fixed income portfolios to make sure they are of high quality but basically we are riding this out.”

Beyond today’s need for capital preservation moves, the looming question is when to get back in. Scoggins says it helps to remind clients thinking of bailing out that markets will rebound “like a rubber band’" once they have bottomed out.

“Being on the sidelines when this happens often makes clients feel even worse than being in the market during the down periods,” she noted.

© 2008 CNBC.com