"Don't be a sitting duck," warns the cover of Harold Evensky's new book, Y2K and Your Money, published last month by Sitting Duck Press of Midlothian, Va. The book was designed to assist financial planners and brokers in educating their clients on the investment risks associated with Y2K.

"People in the financial services industry have told us they need to offer more than a shrug when their customers ask them about Y2K," says Evensky, CFP and co-founder of Evensky, Brown & Katz, a wealth management firm in Coral Gables, Fla. "They're concerned about two issues. First, businesses know they better have answers for customers or their customers will go elsewhere. Second, Y2K is a unique event. You know it's coming and you know when it's coming. Financial firms will not be able to claim ignorance. They have an obligation to educate their clients."

Evensky argues that unless individual investors get sound advice, many will panic and make bad investment decisions if markets become unstable. He expects that this will be particularly true given the long bull market in the United States.

"Having investors sell out in a panic would be the worst of all worlds," he said.

Evensky suggests that investors may need to re-allocate assets to become comfortable with the potential market volatility Y2K might produce. To decide how to re-allocate, an investor should ask, first of all, "How much could you lose?" To that end, Evensky cites a chart in his book listing the worst annual returns of various model portfolios for the 50-year period from 1949 to 1998. He also recommends a number of exercises, included on a CD-ROM that comes with his book, designed to measure an investor's anxiety over a possible market downturn.

For those who say they would worry and sell investments if the market crashes in January 2000, Evensky suggests a 20 percent shift from stocks to bonds.

"If you make a small change and Y2K has a negative impact on your portfolio, you are likely to panic," said Evensky. "If, instead, you make a 20 percent shift, that's a big enough change that you might be able to tell yourself, Thank goodness I planned ahead and made a significant change. I'm not thrilled with this volatility, but I can hang in.'"

Since mailing 200 advance copies of the book to his own clients, Evensky reports that 10 percent to 15 percent of them have already requested that their stock exposure be cut by 20 percent.

Evensky stresses that at his firm, the stock cuts will be made across the board and not, for example, only in emerging markets.

"We look at it this way," he said. "Yes, the U.S. is likely to be more prepared for potential Y2K issues, but the U.S. is also extraordinarily more dependent on technology. If there's a problem with the train system anywhere else in the world, someone throws a switch and the system is back up and running. In the U.S., we took out all the manual switches a year ago, so our system simply shuts down. For that reason, we won't tinker with the intelligent diversification of our stock portfolios."

Evensky said investors should not reduce their exposure to stocks by any more than 20 percent because Y2K could turn out to be a non-event or even a stimulus to the market. If that does happen, the "opportunity cost" of a 20 percent shift is likely to be financially and psychologically manageable for investors, he said.

"If the stock market performance is average - 11 percent (return for) stocks and 5 percent (return for) cash and bonds - a 20 percent shift will cost investors only about one percent," he said.

If investors do decide to re-allocate in anticipation of the turn of the century, Evensky recommends that at the same time they make that decision, they should come up with a "change-back date."

"Don't think, I'll wait until the market is at a low point and then I'll buy back in,'" Evensky wrote. "No one can know when the market is at a low point. If you wait, you could wait forever. The important thing is to pick a change-back date and stick to it."

Evensky recommends using Monday, March 6, 2000, for that date.

"This will ensure that your Y2K period includes not only the transition to the year 2000 but also the leap year date of February 29," he said.

Y2K and Your Money is available from sittingduck.com or amazon.com or by calling PIE Technologies at 1-800-743-6938, ext. 1309. The list price is $9.95.

Subscribe Now

Access to premium content including in-depth coverage of mutual funds, hedge funds, 401(K)s, 529 plans, and more.

3-Week Free Trial

Insight and analysis into the management, marketing, operations and technology of the asset management industry.