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Posted: November 01, 2008

Weathering the Wall Street roller coaster

What financial advisors are telling their clients

Nora Caley
bq). !http://www.cobizmag.com/images/uploads/photos/WealthMangmt_lg.jpg! Scott Wylie, CEO of First Western Financial Investors are nervous, and financial advisors are trying to help relieve some of the stress. Local wealth managers are fielding phone calls and also making calls to explain to clients what’s happening on Wall Street, how it affects their money, and why they should stop watching MSNBC. "This is an extraordinary time, and understanding what’s going on is difficult for financial experts, senators and the treasury secretary," says Scott Wylie, chief executive officer of First Western Financial Inc. in Denver. "If you are going to be nervous, this is the time." Whether the client is a third-generation heir or a worker who contributes to his 401(k) plan each year, the experts’ message is the same: Don’t panic. *Questions for the experts* Clients sometimes call because they watched the news or read something on the Internet. "A lot of times they hear some story about some concern, and they want to know how that affects them," Wylie says. "If somebody is getting near retirement, they don’t want to be having volatility with their principal." For example, when Lehman Bros. filed for bankruptcy protection and JPMorgan Chase acquired Washington Mutual, clients wanted to know if their money was safe at First Western. "What’s getting lost in the story is just because the biggest investment banks in the country are having problems doesn’t mean trust banks are," Wylie says. He also explained to clients that First Western, which is a trust bank, doesn’t do subprime mortgages, so that helped the institution stay healthy. Other wealth managers are fielding similar questions. "They ask, ‘How am I doing? What is your take on the market? Are we intelligently allocated to withstand the turmoil?’" says Wally Obermeyer, president of Obermeyer Asset Management Co. in Aspen, which just opened an office in Denver. "Or they say, ‘I’m listening to the news and it seems like the sky is falling.’" Jon Stuck, regional president of BNY Mellon Wealth Management in Denver, says people of all demographics are worried. "Some of them are panicked, from people with high dollar assets to people with $10,000 in their savings account," he says. Wayne Farlow, a certified financial planner whose Boulder company is called Financial Abundance LLC, says people have been asking him about another topic. "I get the question, ‘With all the turmoil do you think inflation is a concern if we go into a severe recession?’" he says. "I do." Farlow, who writes an online column for ColoradoBiz, tries to reassure people, and also helps them find a way to help their portfolios avoid trouble. "Finances are a very scary thing for a lot of people. My goal is to help people be less scared." Some clients are not worried, but they keep in touch with their financial experts for another reason: to shop for bargains. {pagebreak:Page 1} "We’re not getting the panic selling calls," says Michael Sherman, a principal and owner of the firm Crestone Capital Advisors LLC in Boulder. "Most of them are calling about opportunities." *Answers and reassurance* The financial experts say there are two things nervous investors should do. First, be selective in your media choices and Internet information. Then, revisit your portfolio. "Humans have a tendency to over-extrapolate both good news and bad news," Obermeyer says. "We estimate the severity or importance of something on how many times we hear it, not on how important the event is." For example, he says, when the news was that the Dow Jones Industrial Average dropped hundreds of points in a day, the headlines indicated Wall Street had a big selloff. "But for every seller there was a buyer," he says. "So it would be fine to say many shares changed hands and there are new investors." Like other wealth managers, Obermeyer encourages investors to think long term. A drop in stock price is good news for some investors. "If something goes down in price we may add more if it’s a great company and if it’s a good value." Sherman agrees. "This is certainly a year to be planting seeds," he says. "A lot of other smart investors are buying now and not selling. It’s not the time to flinch." Of course one smart investor is Berkshire Hathaway CEO Warren Buffett, who recently bought interests in Goldman Sachs and GE. The experts agree it doesn’t hurt to watch the Omaha billionaire. "Warren Buffett says you try to buy when everyone else is selling," Stuck says. "If you do that in a disciplined, consistent way, you will build financial wealth." Obermeyer paraphrases Buffett, who quoted the late economist Benjamin Graham, saying, "In the short term, the stock market behaves like a voting machine, and people vote for, say, Crocs or Martha Stewart Living. In the long term, the market is a weighing machine, weighing the underlying fundamentals of the company." Stuck says long-term investors look at the underlying fundamentals of a company, while gamblers try to take advantage of market extremes and try short selling and other tactics. Long-term investors don’t sell a stock just because the company had a bad quarter. "This is the secret to take to the bank: If you sell low and buy high, I can guarantee you your returns will be subpar as long as you play or invest," he says. "People miss that." John Roberts, vice president and director of wealth management sales for Denver Investment Advisors LLC, says he sometimes suggests to clients that they turn off the TV or at least ignore the alarmists and the screaming pundits. "People say, I’m worried, so we walk them through and say, ‘Here is what your portfolio has done,’" he says. "Have discipline and take a longer-term approach, stretch out your time horizon. We see a lot of opportunity in this crisis." {pagebreak:Page 2} Advisors at his firm help clients make sure their portfolios have an asset allocation with which they are comfortable. Clients have varying levels of risk tolerance and also different time frames for when they will need their money. Sometimes clients don’t want to sell, even when their equities have gone up and they can take a profit, but Roberts says sometimes it’s good to redistribute holdings. "We think taxes are going to go up, so right now is a good time to sell some equities and pay taxes," he says. "The biggest mistake I have seen people make is not selling stocks because they didn’t want to pay capital gains taxes." At 15 percent, long-term capital gains tax is lower now than it was in years past. *For the average investor* So what’s the right asset allocation? It depends. For some, it may be 55 percent bonds, 45 percent stocks. For others it may be 50-50 stocks and bonds. "We have clients who sleep through this and they don’t worry, and they are 100 percent invested in equities. Then we have clients who wouldn’t get any sleep with that, so maybe they’re 100 percent in treasuries and earning a fraction of a percent, and they are happy with it," Stuck says. Farlow says most of his clients’ portfolios contain about 50 percent or less in stocks. "To be out of the stock market would not be good, because long term it keeps you out of inflation. Clients might say, ‘Absolutely not,’ so I respect that. The risk tolerance of a client has to be taken into consideration," he says. In August 2008 the inflation rate in the U.S. was 5.37 percent. The average for 2007 was 2.85 percent. That doesn’t mean keeping every stock the person ever purchased. Some investors keep certain stocks they should have sold. "Buy and hold is one thing; buy and ignore is another. That’s the ostrich approach," he says. Every quarter he does a portfolio performance review for his clients, and once a year, a financial plan update. Other advisors agree that revisiting the portfolio is a good idea. "Pay attention to your portfolio, but not so much to the market price as to the quality of the portfolio," Obermeyer says. "It goes back to a value investing approach, to build a portfolio comprised of very good companies with good management, in industries that have tailwinds as opposed to headwinds. That allows one to think much more like an owner rather than a price taker." Roberts’ advice is to keep contributing to a 401(k) plan. "Most people who contribute to retirement plans forget that they are buying stocks," he says. "Don’t cash out of equities right now." Wylie says this is not the time to make any large changes in a portfolio. "I don’t think this is a time to be doing big things, or to pull everything out of the market," he says. "One thing I would tell people is be cautious and not panic and not jump to move too much." {pagebreak:Page 3}

Nora Caley is a freelance writer specializing in business and food topics. She can be reached at noracaley@comcast.net.

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