There's an old expression: Once bitten, twice shy. The saying applies to many investors who were stung by the stock market crash of 2008. Many people pulled back on their equity exposure after absorbing losses at that time – and many of their portfolios are still well below recommended exposure to equities.
Some are even sitting on large cash balances.
The questions for advisors are: How do you help investors in this situation? And, is this a good or bad time to take on more risk?
"The crowd may argue this is not a good time for the average person to begin or significantly add to equity positions," says Greg Newman, senior wealth advisor, associate portfolio manager and director of wealth management at ScotiaMcLeod.
He points to several valid reasons to be cautious, including: the multiyear run of gains for stocks, bringing many market indices to record highs; stock valuations at the high end of historical norms; and the start of spring, which is typically a weak season for the markets.
"But for the average person I would say it is almost always a good time to get started in some equity positions," says Mr. Newman. He notes the level of equities within a client's asset allocation and the speed of deployment into equities is dependent on their views on investing, and stomach to stay the course.
"It's vital to not bite off more than you can chew," he says. To help make that work, he puts together a conservative model for clients that is still able to meet their goals. "That way, when markets are dramatic or scary, it's easier to sleep at night and 'gut it out.' "
Wolfgang Klein also advocates putting your money to work – with some caveats. Mr. Klein is senior investment advisor and portfolio manager at Canaccord Genuity.
"For most people there's no better time to start investing than now," he says. Mr. Klein adds this is particularly true of someone who still has several years until retirement, and is underexposed to equities.
He says if clients are nervous about getting into stocks, he may suggest initially deploying only a certain percentage of their cash balance into his investing model. Then, if clients see the performance and become more comfortable with the model, he will suggest investing more. "It's an art, not a science. You have to earn people's trust."
Despite that view, Mr. Klein does believe caution is in order at this point in the market cycle. He feels that having a higher than usual weighting in cash makes sense right now, as it puts investors in a position to buy stocks at a discount in the event there is a drop in the market.
As well, Mr. Klein says he has clients who have been taking advantage of the strong real-estate market by selling investment properties, and are now looking to deploy the proceeds of those sales. "I am wary when I receive new money at these [current stock market] levels," he says.
Jeff Hull is also familiar with the challenges of helping investors who are overweight cash and reluctant to deploy it. Mr. Hull is a senior financial advisor at Manulife Securities.
"It is paramount that an investor is comfortable and confident in the planned next steps and choice of investments," he says. He notes investors should always match the investments to their time horizon and other factors. "Being timid or apprehensive is a natural feeling if they have ever had a bad experience in the stock market," he says. "But investors need to control fear and determine fact versus fiction."
Mr. Hull believes sitting idle on the sidelines, if an investor is many years from retirement, can be detrimental. He believes investors need to seek quality advice on how to take advantage of current situations and the economic climate.
As to whether it is appropriate for the average investor to begin or significantly add to equity positions right now, Mr. Hull says the best time to create strategic next steps is immediately.
"Procrastination is the thief of time and compounding." He notes that he likes to spread out the investing process over time, investing in 'smaller pieces' on a scheduled basis with clients.
"We build a portfolio like a home, one brick at a time. There is no rush. Investors should take all the time they need to feel comfortable with their plan, their advisor and potential investments." He notes gradually investing cash balances using dollar-cost-averaging is often part of his approach.
Mr. Newman also recommends dollar-cost averaging in these cases. As well, he points to the importance of diversification and an appropriate asset mix. "Bonds and other asset classes can be shock absorbers and a source of funds to harness the opportunities that come through the inevitable pullbacks," he says. As far as preferred investment vehicles, he says mutual funds, ETFs and individual stocks can all play a role. "It's the approach that is vital to whether the strategy succeeds."
Mr. Klein also points to some advisor fundamentals, such as pairing up asset mix with time horizons, assessing the level of risk tolerance of the client, and the suitability of specific investments.
Mr. Hull says investments should always be chosen based on an investor's needs, goals, objectives, time-frames and risk parameters. He notes a multifaceted approach can be used, depending on the investor. As far as the investment vehicles to choose, he points out that overall fees are important to keep in mind. As well, he recommends clients use stop-loss orders, which trigger a sale if a stock falls to a pre-set price. He says that can help their peace of mind.