FA Playbook

Advisors: We need to remain ‘financial compass’ for clients


Now that the Dow Jones industrial average has hit 20,000, many investors are wondering what this means to them.

To that point, financial advisors expect to see clients exhibit some emotional biases when it comes to their investment decisions. They may experience the fear of missing out, greed and overconfidence.

"The Dow, or any index, hitting a certain mark is alone not a reason to take action," said Adam J. Reinert, a certified financial planner at Marshall Financial Group. "In doing so, investors will likely be exhibiting signs of some cognitive or emotional biases present in behavioral finance."

Reinert said it's very important for investors to remember that focusing on the long-term picture, rather than short-term approaches, often produces better results.

Traders work on the floor of the New York Stock Exchange.
Michael Nagle | Bloomberg | Getty Images

"The key for most investors is to continue to be holding a diversified portfolio that is aligned with their goals and objectives," he said. "Ultimately, valuations depend on certain fundamental and technical factors."

Several advisors also warned that investors should not try to time the market and should not get caught up in the hype over the Dow hitting the 20,000 mark. Invest for the long term, remain patient, sticking with your financial plan, and let the power of compounding returns do the work, advisors say.

"Many clients of mine who are considered conservative now do not want to miss the boat, and lots of conversations revolve around taking profits at these levels and waiting for a pullback in the market, " said Alexander G. Koury, a CFP at Householder Group. "Some clients are now questioning performance, and it is my job to remind them of the long-term strategy.

"We are nearing the point of exuberance and desperation, and it's better to be fearful when others are greedy."

More from FA Playbook:
How one advisor calmed clients after Trump election win
Can you afford to help your kids with college?
How to survive a cybersecurity breach

Basically, advisors say investors need to view the latest Dow milestone as a reminder to simply engage in some basic moves that typically enhance returns over time. Investors should consider shifting money from asset classes that have appreciated and are now under-performing, to restore a portfolio's target mix of stocks and bonds. In taxable accounts, investors should sell holdings with losses to offset taxable gains.

"The Dow at 20,000 is as arbitrary a number as 17,263, but as we know, psychology is a major driving force in the markets," said George Gagliardi, a CFP at Coromandel Wealth Management. "So reaching the so-called 'magic' number of Dow 20,000 resonates with the general public, though not me."

Ask if he would hear from clients, Gagliardi said, "Possibly a few who, thinking the typical short-term approach, will want to know why I'm not being more aggressive with their equity portfolios.

"At which point, I will explain the concepts of an extended market, the importance of diversification, and whatever else it takes to convince them that a long-term investment approach shouldn't be affected by near-term events that may be ephemeral or fleeting."

Gagliardi said some clients may ask to take money off the table, but he is prepared for the other response — overconfidence.

"My job as financial advisor is to act as their 'financial compass' and to do my best to take emotion out of the investing equation," he said.

Marc E. Henn, CFP at Harvest Financial Advisors, expects that some clients "will want to take some chips off the table and lock in some gains."

"However, most of our clients will continue on the same path, investing in their current allocation and looking ahead to a stronger economy as leading economic indicators are positive," he said.

Cynthia L. Turkington, a CFP at Fair Trust Financial, sees no reason to stray from the game plan she has with each client.

I see many who are still concerned about the insecurity we have in the world today. When people feel insecure, actions often have a feel-good effect akin to a sugar high.
Mitch Goldberg
president of ClientFirst Strategy

"With the Dow climbing to 20,000, we did not make any significant changes in how we work with clients," she said. "Each client we work with is unique and their investment allocation reflects their age, risk tolerance and goals for their life and retirement."

She said if a client starts talking about moving away from a disciplined investment strategy, she will try to find out what's driving the behavior and then review with the investor why they will not be making any changes to their investment allocation.

"One mistake that people can make when the market reaches an all-time high is to either completely get out of the market now or if you have been out of the market to jump back in," she said.

"You really never want to try to time the market," Turkington added. "It's nearly impossible to do so. That's why you want to find an asset allocation that works in all types of markets, so you can stay invested and sleep at night so you can achieve your financial goals."

Mitch Goldberg, president of investing firm ClientFirst Strategy, said "the stock market rarely complies with expectations, but it does re-teach the same lessons over and over again."

Goldberg points out that in addition to the Dow milestone, investors are now enjoying the Trump rally.

"But I see many who are still concerned about the insecurity we have in the world today," he said. "It doesn't matter which generation you were born into.

"When people feel insecure, actions often have a feel-good effect akin to a sugar high."

Putting this into a markets context, Goldberg said investors "tend to lose the ability to think through the consequences beyond five minutes out."