If you've put in a worried call to your financial adviser recently, or just felt a little motion-sick watching the markets rise and fall, you're not alone.
Omaha investment advisers say they've had more than the usual number of end-of-year meetings with clients wondering how to handle their investments amid still-volatile financial markets and political indecision, with no stability in sight.
But on the whole, a survey of Omaha investment advisers reveals that these professionals, whose firms collectively manage billions of dollars of individual and institutional wealth, are approaching the new year with optimism and advice to hang on for the long run.
2012 saw growth
Despite the turmoil, 2012 was actually a pretty good year for investments.
“It's funny, because it doesn't feel that good,” said Mike Bridgman of Cambridge Advisors. “It seems like there's been one flavor of bad news after another.”
Between the European debt crisis, instability in the Middle East, a U.S. presidential election and escalating worry about the so-called fiscal cliff, the markets “climbed the wall of worry,” Bridgman said.
The Dow Jones industrial average closed Monday at 13,104.14, 7.3 percent above its 2011 close of 12,217.56, and the Standard & Poor's 500 closed at 1,426.19, 13.4 percent above its 2011 close of 1,257.60.
Some of the growth was attributed to the September stimulus, the third major round of Federal Reserve bond-buying since the 2008 recession.
“That's good from the standpoint it made the market go higher, (but) I'm always concerned when it's not fundamentals driving the market,” said Mark Wynegar at Tributary Capital Management.
Ron Carson's firm, Carson Wealth Management, expected less growth, predicting a year ago that the Dow would close in 2012 at 9,700.
“We were really concerned about downside risk that didn't really play out,” Carson said. “All the fiscal stimulus that the Fed made literally trumped the underlying fundamentals.”
Brian Kirkpatrick at Bridges Investment Management said his clients did well, especially investing in equities.
“The returns were very good this year,” he said, but not necessarily because of a growth in valuation. “Companies did a better job of pushing profits to the bottom line.”
While markets are never a sure thing, the advisers said there has been an unusually high degree of uncertainty going into 2013. Markets fell each day last week as lawmakers pushed for a last-ditch effort to avoid the fiscal cliff, the austerity package of tax hikes and spending cuts set to automatically take effect today.
“Markets don't like uncertainty,” said George Morgan, finance instructor at the University of Nebraska at Omaha. “The markets are going to be happier if they know things are going to be bad than if they're not sure.”
Advisers' clients have been wondering about investment and tax planning strategies given the varying potential outcomes of the fiscal cliff talks.
“Right now,” Carson said, “the questions I'm getting are, 'We get a deal — what should I do? If we don't get a deal, what should I do? And does it matter? Can we ever pay all of this debt back?' I sense more insecurity as I talk to business owners around the country than I've sensed in a long time. People are really concerned about their future.”
Wynegar said, “Washington would do everybody a big favor if they would put some certainty around what the rules are going to be going forward.”
He'd also like to see more effort not just on reducing the budget deficit but on developing policies that spur economic growth.
No matter what the cliff resolution is, it is going to be detrimental to gross domestic product growth, Kirkpatrick said. “No matter what the compromise is, we're going to raise taxes and we're going to cut spending. Both of those things, unless they spur growth in other areas, are going to diminish both the government's and consumers' ability to spend.”
Of not reaching a fiscal cliff compromise by the end of 2012, Kaplan said: “It's not the best solution, but it will reduce the deficit.” He said markets “overreact” to the uncertainty, making now a good time to invest.
Most advisers said it's likely the markets will fall toward the beginning of the year but end the year with a gain. Several predicted the Dow would end the year at a record high, with two advisers saying it could hit 16,000.
In the short term, Wynegar said, he wouldn't be surprised by a sell-off. But throughout the year, he and others expect moderate earnings growth.
“We think the second half of the year could be better as we get a little clarity as to how we're going to deal with the budgetary issues,” Kirkpatrick said. Dan Feltz of Feltz Wealthplan agreed: “Once we do get certainty, the market tends to pivot off that and move in a positive direction.”
Feltz said he is cautiously optimistic because of some good economic fundamentals such as a growing housing market.
While there will be volatility, Jeff Sharp of SilverStone Group agreed, “We're positive. We think 2013 could be a very good year in the markets despite the fact that 2012 was a good year.” He said corporations are sitting on record levels of cash and are prepared to make investments that will get people working.
Carson said his research committee is less willing to bet on gains.
“There probably is going to be a lot of downside risk in the market,” he said. “We're all talking about the fiscal cliff, but even if it's resolved, I don't know if it's enough to give us the economic growth to give us true employment” gains. “If things start to unravel and the world loses confidence in the U.S.' ability to service its debt — i.e., there's no entitlement reform — we could easily see the market down 20 to 30 percent.”
Crafting a strategy
Predicting what might happen in the markets as a whole is not as valuable to clients as identifying good companies trading at good prices, Wynegar said.
“A good company is going to be worth more three, four, five years from now than it is today,” he said.
The advisers said investors would do well to study and buy individual companies that serve needs and growing markets. They mentioned biotechnology, agriculture, computing, housing and health care as industries with growth potential. Kaplan likes Apple and McDonald's as “good, solid companies.”
Several advisers said they are looking overseas. “They should not ignore the opportunity that foreign markets present,” Sharp said.
Bridgman and Feltz said emerging overseas markets have low debt and are growing at a faster-than-average pace.
Several recommended equities over bonds, especially government bonds but in some cases corporate bonds as well.
“If we're looking for income, we're looking at high-quality equities with good dividend yields,” Kirkpatrick said. While there's more potential risk, he said, “We think in the long run you're going to fare just as well owning the equity.”
Feltz said it is important to keep a balanced portfolio, including cash reserves for rainy-day needs as well as buying opportunities.
Sharp also recommends clients hold a diverse portfolio “and not place any bets on any one sector or asset class.”
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