Advisors Walking The Eurozone Tightrope
To be sure, this isn’t a black swan. You can see this one coming. But that doesn’t mean you shouldn’t do anything to protect your clients from the crisis in Europe. In fact, against this backdrop, BlackRock, the world’s largest asset manager, is telling investors to do the following:
- Balance investing in risk assets for the long run with guarding against short-term price declines. Consider using out-of-the-money call options to capture a sudden risk rally. Investor positioning is bearish, especially for equities, upping the chances of a snap-back.
- Top-quality multinational companies with strong overseas sales are preferred for now. This is a crowded trade, so BlackRock is looking at financials, dividend-payers, and domestically focused European companies when valuations hit bottom.
To be fair, BlackRock, which has $3.7 trillion in assets under management, isn’t alone in making moves with their client’s money. Here’s a look at what some advisors are doing.
Michael A. Branham, CFP®, a financial planner with Cornerstone Wealth Advisors, Inc. has significantly pared back the firm’s "international core" allocation, which is built predominantly on developed economies, largely in Europe. “This has slightly reduced our overall international exposure, but the bulk of our international exposure is in our ‘international small cap’ and more so in our ‘emerging markets’ allocations,” Branham said. “Each of these last two categories has been slightly increased as the ‘core’ allocation has been reduced.
Others have made changes too, though in a very different way. Michael Finer, CFP®, CPA, and the CEO of Major League Investments, is increasing the percent allocated to commodities and precious metals. “We have increased some portfolios to up to 20% of gold, silver, and oil for example,” Finer said. “For our performance accounts which are more aggressive, we have ratcheted up the precious metal allocations even more substantially.”
In addition, Finer said his firm is “making sure that the base equity portfolios have rock solid balance sheets and excellent dividends and cash flow so that they may weather the storm.”
Like BlackRock and Finer, other advisors are looking at strong dividend payers as well. “We are maintaining a concentration toward high-quality, multinational companies for the time being,” said Joe Pitzl, CFP®, the director of financial planning at Intelligent Financial Strategies. “We have no idea what is ultimately going to happen in Europe, so rather than trying to predict that and what is going to benefit most from it, we are focusing on companies that are going to survive and thrive no matter what happens.”
Companies such as Coca-Cola, Nestle, and Berkshire Hathaway may experience some kind of a short-term fluctuation in stock price, he said. “But Greece leaving the Euro is not going to impact the long-term viability of these companies,” said Pitzl.
Some advisors, however, see less value in making tactical moves and more in opening up the lines of communication with their clients. “The best thing advisors can do about the volatility issues that we have had over the last three years with regard to Europe and Greece is to listen, ask questions about their biggest concerns and have a strategy that helps navigate their clients through the wild swings,” said Dave Caruso, CFP®, the founding chairman and managing director of Coastal Capital Group, LLC.
That’s not to say that Caruso hasn’t made any adjustments to his client’s portfolios. For the last five years, for instance, Caruso’s firms has used technical analysis (such as the 200-day moving average) to make tactical adjustments to portfolios.
Still, Caruso said the best medicine for the current crisis is this: “I still feel that open and active communication works best as clients need to focus on their longer term goals vs. the inevitable short-term crosscurrents. Most clients know in their hearts that the markets are not going to be straight up and a little sprinkling of long-term optimism from a country with a great track record might help.”
Others agree. “Advisors should use recent events as educational opportunities to reinforce positive investment behaviors,” said Rob Schmansky, CFP®, the founder and principal of Clear Financial Advisors. “Steer clear of falling into conversations about items clients can't control, and focus on those things we can.”
For advisors who might have clients who are “too active” in their portfolios, Schmansky advised using the events to discuss the risks of betting on sectors, individual countries and currencies. “Bring diversification into the conversation,” Schmansky said. “Discuss ownership of real estate and other real assets as a potential complement to financial assets.”
In addition, Schmansky suggested that advisors talk to their clients about how it is a fallacy to view money in the bank as wealth. “Having too much in cash may make them feel comfortable now, but it will never maintain a standard of living,” said Schmansky. “Likewise, having too much in guaranteed income may prevent clients from keeping up with inflation.”
Read "Greece and Europe Still Hold Sway Over Global Markets."
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