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Heavy New Year's Sell-Off Keeps Advisors on Their Toes

By Murray Coleman January 5, 2016

As markets sold off heavily Monday amid more apprehension about plummeting stocks in China, Merrill Lynch was sending out new research showing that bearish sentiment on Wall Street was approaching market lows of 2009 – right before stocks came roaring back.

Whether this latest turbulence fades and markets keep climbing, advisor Raj Sharma was busy on the first business day of a new year reaching out to clients.

The Boston-based FA at Merrill says he believes it’s crucial in turbulent times to let clients know that his team, which manages $10 billion, is keeping a close eye on markets. As the FT 400 FA puts it: “We want people to hear from us first, not the cable news networks.”

On Monday, the group put together a special research report to email clients providing a backdrop on what was really happening in markets.

Interestingly, Sharma has been following Merrill’s so-called sell side indicator – which tracks institutional sentiment behind big moves in stocks – for nearly two decades. Just naturally, he thought that bringing up the model’s latest readings was an important event for clients to be aware of now.

Still, the advisor is using such sentiment indicators as contrarian signals to keep a steady hand. By his calculations, when sentiment has fallen in the past to such rock-bottom levels, stocks have rallied over the next 12 months some 96% of the time. “If Wall Street is overly bearish,” says Sharma, “then that’s actually good news to pass along to investors.”

Another veteran wirehouse FA, Neil Weissman of Wells Fargo Advisors, was also taking time Monday to let clients know that “the sky wasn’t falling.” The advisor, whose Ann Arbor, Mich.-based practice manages about $300 million, feels that personal phone calls are better than emails or written alerts in times like these.

“We’re finding that as market turbulence increases,” he says, “taking a more personal touch to reaching out to people is something that our clients really appreciate.”

Neil Weissman

Besides taking a proactive approach to the current market blip, Weissman is using such discussions to help gauge reaction to a disappointing 2015 when most asset classes suffered losses. “It’s just natural for some people to wonder what worked and what didn’t last year – and why,” he says. The most recent bout of market volatility, he adds, is helping him to jumpstart that discussion and “reinforce how our long-term investment strategy is still working.”

It’s part of an ongoing educational process that the longtime FA says he’s emphasizing in conversations with clients. For example, with blue chip stocks down around 2.5% at midday Monday, Weissman was pointing out that portfolios his team managed were down much less – 0.6% or less in many cases.

At the same time, Weissman also liked to deliver another interesting factoid he’d dug up in researching broad market trends: Missing the 10 best trading days over the past 20 years in blue chip stocks would’ve reduced an average investor’s returns by nearly 50%.

“What I’m trying to do is get people to realize that making knee-jerk reactions during a market selloff can be counterproductive to their long-term investment plans,” he says.

Advisor Sandra Cho in Encino, Calif., says she spent much of yesterday going to see clients in person as well as directly calling different families. The ex-JPMorgan Chase private client rep, who managed $184 million at the bank, recently launched independent RIA Pointwealth Capital Management.

While most of her clients are long-term oriented, some are trying to live on fixed income generated from their portfolios. “For retirees, something like Monday’s market drop can be very traumatic,” she says.

Instead of overreacting, though, in most cases Cho was offering more proof that her selection of fund managers in riskier areas of the market was paying off. One topic that keeps coming up with income-hungry investors, she observes, is market turmoil created by recent selloffs in high-yield bonds. Cho believes that junk bonds were overly punished after Third Avenue Management shuttered its junk bonds fund last month. Another downdraft in the fourth-quarter came after a spate of defaults in energy, she suggests.

Index-based funds were generally hit harder last month by junk’s tanking than the actively managed funds she prefers, according to Cho. But that’s just one asset class that she’s been re-evaluating with clients.

“I’m finding that now is a great opportunity,” she says, “to re-engage people to make sure their allocations to different asset classes really match their stomach to take on more portfolio risk.”