MIAMI - Money is flooding back into stocks. Opportunities abound in streams of government-backed pension funds in Europe. Asia and emerging markets beckon.
But what time bombs are lurking in customers’ fund holding? And how do you explain the risks in what they possess?
"There's ample fodder" to meet with clients and talk about what's happening in markets, when there’s a signal movement, says Matthew Coldren, executive vice president at Natixis Global Associates at the 2013 NICSA Annual Conference and Expo. A movement such as the swing of $80 billion out of equities in one month, to $20 billion in in the next. After hundreds of billions had been pulled out since 2007.
“People are still uncertain about what’s going on,’’ he said, in the opening “Face the Members” session. Regulatory changes and market movements give advisors chances to educate customers about the risks, inside a portfolio.
How to explain what risk is?
Simply put, Coldren, says, it is how much the customer can lose in a given investment.
And, how much a customer can stomach to lose, in the overall portfolio.
On the overall scale, that discussion boils down to, in a $500,000 account, how much can the person, household or firm afford to lose, if events turn bad?
$50,000? $100,000? 10%? 20%? Define the bottom line. That will guide a re-allocation of asets.
Then, go back over what they own.
Make sure each risk is measured carefully. Advisors and brokers often underestimate the risk associated with stocks, in particular, Coldren says. Stocks, as October 2008 proved, can lose 40% of their value, fast.
But the question should be: Can you handle shocks? Are you ready for short-term aberrations?, said Martin Boyd, president of Sungard’s asset management business.
Often, a stock will fall 10%. But frequently will rebound “beyond that 10%,’’ Boyd said.
So, “yes, there's volatility risk. But that's not the same as outcome risk."
Moderator Tyler Mathisen of CNBC said risks about structured products a decade ago, were not well known, for instance. And customers got locked into products, that can be hard to get out.
“Let’s talk about outcomes,’’ said Coldren, and how to get there. That will frame the discussion.
Take the darling of investors in recent years: Fixed-income products, particularly U.S. Treasury holdings.
Investors need to be told that there are risks with holding even long-maturity Treasuries, Coldren said.
And that equities, for instance, have already doubled in value – before the January surge started. The Standard & Poor’s 500 stood at 735.09 at the end of February 2009. And now is past 1,500.
This has been the "most hated bull market in history," Coldren said.
And should be part of the discussion about risk, when the discussion turns to moving more assets, at this point, into stocks.