As the financial markets hit investors with gale-force market dips, most advisors are telling their clients to drop anchor.

And, at least in the short term, most investors heeded that advice as the Dow Jones Industrial average closed up more than 400 points Tuesday, just one day after losing more than 600 points, the sixth-largest, single-day decline in history.

Managing client expectations and emotions is and has always been a critical part of any financial advisor's practice.

Not long ago, Richard Tsoumas, president and chief executive officer of The Planning Group, started calling all of his clients to explain a previous sell-off on Aug. 4 that sunk the Dow by 512 points. Most of the time, he said in a telephone interview on Tuesday, he told investors that the dip was likely to change direction and that they should not to sell out of the market.

Except in a handful of specific instances -- such as if clients are retired and are withdrawing cash to cover monthly living expenses for the next three to six months, if the market is behaving outside of clients’ natural risk tolerance or if a scheduled retirement has come early -- Tsoumas advocates sitting tight and riding it out.

“We’ll refer back to the clients’ financial plans as the core of the decision-making process,” Tsoumas said.

Most clients at The Planning Group, whose collective assets under management amounts to almost $200 million, can afford to maintain their equity positions through market turbulence. Indeed, after losing 5.5% of its total value on Monday, the Dow came back 1% by midday Tuesday, recouping some of those steep losses. Others, though, have sold businesses and real estate, so they might want to retain those proceeds.

At Burns Advisory Group, in Old Lyme, Conn., Tom McGuigan thinks the market is in a panic and he's not advising his clients to sell out of the market.

In fact, the firm's 70-plius household clients have been very quiet. The firm is in the midst of a series of education lunches. Two weeks ago, the topic was “The Risky Side of Risk,” which had the group talk at length about market volatility, McGuigan said in a telephone interview on Tuesday.

Clients realized that market ups and downs were not their biggest risk of all. It was inflation they should be most concerned about.

They will address that by discussing how to assemble a broadly diversified fixed-income portfolio to generate returns for solid retirement income. In fact, the topic of the next learning luncheon will be: “How To Recreate Your Paycheck in Retirement,” McGuigan said. The group will try to hit bonds across the credit spectrum and balance accordingly, McGuigan said.

As for stocks, corporations have amassed cash, profits are near all-time highs and most companies in the S&P 500 derive at least 50% of their revenues from busy emerging-market economies, McGuigan said. All of those factors shore up the firm’s confidence in the corporate sector.

As for the market’s behavior right now, McGuigan says “they are panicking.”

Clients at Titan Financial Services in Waldorf, Md., are not in a panic, but many of them are professional athletes. In the best of times, the collective allocation to equities is a mere 35% to 40%, said Christopher Franklin, founder and chief executive officer of Titan.

“The first contract might be their last, so we cannot put 100% into the stock market,” he said. “We don’t know when their careers will end.”

Franklin said the U.S. is in a tight credit environment where lending from small business loans is scarce and the housing market has yet to rebound.

Further, the debt ceiling compromise did not go far enough to address the nation’s budgetary issues. “Congress only came up with half a loaf,” he said. “We’ve got to come up with $2 trillion more dollars and get [our] house in order.”

Stocks will come back, Franklin said. “But you better know your client’s situation,” he said. “If he goes down $200,000, what if that was the last $200,000 he had?”


For more on the debt rating downgrade fallout, take a gander at Financial Planning's special report package for details, insight and advice from some of the financial planning industry's foremost experts.