Recent market turbulence has everyone feeling a bit nervous about the stock market -- everyone, that is, except financial advisors. Is that a good thing, or is it a sign that advisors aren't worth the money you pay them?
Pushing more risk
A recent survey from Russell Investments asked financial advisors whether they planned to recommend increasing or decreasing their clients' exposure to various asset classes. According to Russell, advisors are primarily suggesting a return to high-risk assets. Of those surveyed, 48% plan to increase allocations to emerging-market stocks, with almost as many boosting exposure to foreign stocks generally and to U.S. value stocks.
On the other hand, advisors are urging clients to decrease exposure to perceived "safe" investments. A whopping 54% plan to cut allocations to Treasury bonds, while 43% will reduce high-yield bond exposure and 39% expect to have less money in corporate bonds generally.
The survey was just the second installment of Russell's quarterly look, so unfortunately, we can't go back and see how pros felt this time last year. Looking at last quarter, though, the results look similar. Some subtle differences are interesting; the latest survey was taken during the market swoon in late April and early May, and more advisors reported adding to large-cap U.S. stock positions than during the first quarter.
Smart move or suicide?
In general, though, the theme advisors repeatedly sounded was that clients needed to get more aggressive to increase their chances of reaching financial goals. Nearly half said their clients either didn't have enough money, or weren't saving enough of what they do have.
In that light, it's easy to understand how advisors are in a tough position. On one hand, they may not feel all that bullish about the market at this particular time. Yet focusing on the long run, they realize that Treasuries and insured bank CDs aren't going to get their clients where they need to be.
Understanding true risk
What many advisors struggle with is explaining different kinds of risk to their clients. As an example, consider the top pick among advisors: emerging markets. You can look at historical returns of emerging-market stocks and see that they're more volatile than U.S. markets. But with both China and India slated to see their economies grow at an 8% clip or better through 2011, investing in dominant companies in those markets is arguably less risky than dealing with more sluggish economies.
In China, for instance, China Mobile (NYSE: CHL ) has big market-share leads over its competitors and stands to gain the most as prosperity increases demand for wireless communications. Oil giant CNOOC (NYSE: CEO ) continues to seek out new resources around the world, including its latest bid for a stake in a Brazilian oilfield owned by Statoil (NYSE: STO ) .
Meanwhile, in India, banks such as HDFC (NYSE: HDB ) and IBIBI Bank (NYSE: IBN ) are expanding aggressively and offering both sophisticated business financing as well as regular savings accounts and home loans to customers. Despite competition from state-owned banks and rich valuations, they should continue to see growth as long as the economy stays healthy.
In comparison with emerging markets, things such as bank CDs may seem tame. But what's the most tame about them are their returns, which simply aren't high enough to meet most investors' long-term needs. Owning them isn't just risky; often, it ensures that you won't reach your goals.
You get what you need
Even in slower economies like the U.S., there are good reasons for owning stocks over bonds. At just more than 4% for a 30-year Treasury bond, yields on fixed-income securities don't compensate you very well for the long-term risk of higher interest rates. In contrast, both Merck (NYSE: MRK ) and Exelon (NYSE: EXC ) offer double-digit earnings yields and dividends above the 30-year bond rate. And even though you won't get strong growth with these stocks, there's at least the prospect of some growth, which bonds never deliver. That makes now a good time to ratchet up risk levels, especially among clients who are still shellshocked from the worst of 2008's bear market.
Smart financial advisors aren't crazy to be urging clients to take market risk right now. Often, the greater risk comes from not being aggressive enough with your investments. If you haven't been able to muster the courage to get back into the stock market, then talking with a financial advisor might give you the push you need to get your finances back on track.
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