Cooling Expectations

Once every few weeks Dave Almquist has floor duty at his A.G. Edwards office in Dana Point, Calif. Some of the phone calls he fields from the public are a little crazy. "People seem to be in a hurry to catch everything before it gets away," Almquist says.This past November, callers were desperately seeking UPS shares, an IPO Almquist says was oversubscribed by a margin of 10-to-1. A.G. Edwards didn't

Once every few weeks Dave Almquist has floor duty at his A.G. Edwards office in Dana Point, Calif. Some of the phone calls he fields from the public are a little crazy. "People seem to be in a hurry to catch everything before it gets away," Almquist says.

This past November, callers were desperately seeking UPS shares, an IPO Almquist says was oversubscribed by a margin of 10-to-1. A.G. Edwards didn't have any shares to sell but "the demand was out there," he says. "People were calling in without doing too much investigation." Demand pushed shares of the stock to 76 briefly before it settled at 63. Many overly optimistic UPS investors bought high and sold low.

If a company name is being barked all over the media, it's time to be cautious, Almquist says. The 20-year veteran remembers the frenzy that surrounded biotech companies in the late '80s and early '90s. Before coming back down to earth, "those prices got out of kilter with reality," he says. The situation is much the same with tech stocks today.

Even Almquist's own clients who have been tutored to look for value are sometimes lured in. One client recently wanted to ditch slow-moving pharmaceutical companies like Merck and Bristol Meyers for the sizzling tech issue Red Hat. After all, shares of the Linux software provider had soared from 90 to 250 in three weeks, its market cap swelling to more than 16 billion dollars. Not bad for a company with barely 10 million dollars in revenues and no earnings. Almquist persuaded his client that jumping onto Red Hat's runaway train was not a good idea. He reminded the client why they had invested in pharmaceuticals in the first place--good relative value and growth potential.

Merrill Lynch rep Larry Reed, a self-described "value guy," says he gets similar calls in his Oklahoma City office. In fact, some people want to put all of their retirement assets into Internet stocks. The veteran adviser instead suggests a reasonable mix of value companies and bonds.

Like Almquist, Reed sees similarities between the biotech euphoria 10 years ago and today's overvalued tech stocks. "One hundred and four biotech companies came public between 1989 and 1992," Reed recalls. "Forty-four of them are no longer in the business. We'll see that kind of fallout in the Internet, too."

What to Do How do you keep clients on an even keel?

* Remind clients that tough times always come.

"Bear markets are going to happen," says Harvey Cook, a rep with Merrill Lynch in Memphis, Tenn. "They are inevitable. We just don't know when. So they should not be a surprise."

Cook and other reps suggest using charts that show an increasing probability of positive returns as holding periods increase.

Jeff Burandt, an independent Lockwood Financial Services adviser in Dallas, explains the world this way: "There are growing periods and there are winters [corrections]. Flowers bear fruits at different times."

Always forewarn your clients that there is a likelihood of a bear market, especially between spring and October, says Robert Cable, a veteran rep at Scotia McLeod in Mississauga, Ontario, Canada. "Be prepared to lose as much as 50 percent of what you've invested in growth stocks," he warns. "This short-term risk is the price you must pay to enjoy the benefits of much higher long-term returns from stocks."

Ken South, a Salomon Smith Barney producer in Costa Mesa, Calif., also does not shy away from dramatizing risk potential. "I show clients a chart of a stock that has gone crazy," he says. "Then I turn the chart upside down and try to convey that the market is that volatile." New investors, especially, haven't seen how highfliers can get rocked, he says.

* Stick with a good plan even if it is underperforming.

"If you ain't in, you can't win," South says. "If you miss an up day in [a particular] sector that is benefiting, you can significantly hurt your overall performance." So try not to time or shift things too much.

Burandt describes an investment strategy as an "educational, ongoing, applied process. You need the right allocation of different stocks to focus exclusively on your goals." What's going on within narrow sectors shouldn't be a major concern.

* Don't forget to diversify.

Diversification is not just for wimps. Spreading risk is appropriate for most people. Few can devote the time necessary to learn intimate details of the companies they have big bets on, or accept the risk of concentrated positions. Nor do they need above-average returns and risks.

Cook starts with the basics--buying bonds and spreading the risk among value, growth and global stocks.

Calvin Cramer of Merrill Lynch in Manchester, N.H., suggests diversifying a portfolio into different industry sectors. Avoid getting bogged down with numerous asset classes, he warns. Although he's not a big user of mutual funds, Cramer says funds and muni bonds can be relatively safe havens.

For growth, Cable recommends sticking with 10 leading stocks at one time, while paying attention to clients' overall asset allocation.

* Communicate and be prepared for grumbles.

"You can lose good accounts if you don't stay in contact," South says. "And personal contact is the most important aspect of the job during a bear market."

A bear market, on average, occurs every three to four years. Therefore, clients won't be happy about a third of the time, Cook says. He tells clients the most recent bear-like market conditions were in 1994.

But regular contact is important in good markets, too. "You can never convince investors that it's cool to underperform the market," Cook adds. "But it may be more prudent. The market has narrowly based indexes, which are exposed to a great deal of volatility."

"Don't compare a portfolio to indexes," Cramer agrees. "They have different missions. I work with my clients to tailor a portfolio so my clients get the returns they need to reach their personal objectives."

Now you know the drill. When people want to abandon their plans and go for the hot hype of the month, it confirms just how desperately people need sound advice.

Brokers disagree on what constitutes a bear market.

Robert Cable, a veteran rep at Scotia McLeod in Mississauga, Ontario, Canada, defines a bear market as a downward trend in all the major markets of 20 percent or more lasting six months or longer.

Calvin Cramer of Merrill Lynch in Manchester, N.H., notes that spots of weakness can produce bear markets. "I think you could say the drug market is in a mini-bear market right now," Cramer says. "Pharmaceuticals are off 20 percent to 25 percent from a year ago."

Ken South, a Salomon Smith Barney producer in Costa Mesa, Calif., says lack of breadth has created a "stealth" bear market. "A few broad sectors like petroleum, software, hardware and leisure are 'dragging up' the averages," he says. "In reality, on the NYSE, declines significantly outnumber advances."

Jeff Burandt, an independent adviser in Dallas affiliated with Lockwood Financial Services, says a big downturn hasn't been seen for a quarter century. Trouble could come when retiring baby boomers start taking money out of the market and spending habits drastically change. "When consumer spending falls, the stock market falls, and we haven't seen that kind of shift since 1974," Burandt says.--Tom Nelson

Investors don't ask these smart questions, revealing why they need advice.

1) "What sectors have been underperforming? Let's buy them."

Unless you've trained your clients or have a few savvy investors, you won't get calls asking about dead and dumb stocks.

A West Coast wirehouse rep, who asks not to be identified, recalls a typical scenario. A year ago he was getting calls from clients wanting red-hot Internet stocks. Those calls dried up this past summer after that sector sold off. He speculates now might be a good time to buy, say, tobacco stocks, since the companies are mired in legal problems--and since absolutely no clients are suggesting the idea.

2) "When can we do our annual portfolio review?"

Wouldn't it be great if clients called wanting to set up a review? Getting a hold of every client is a "massive, Herculean task," says Sharon Erickson Wulff, a veteran rep with Prudential Securities in Minneapolis. "It would be really nifty if people would call me instead."

Reviews underscore the importance of long-term planning and working to meet individual goals, brokers say. These regular communications help neutralize anxieties caused by short-term market movements. Also, clients can be pleasantly surprised when they see they've done better than they had realized.

3) "I'm retiring today and expect about a 9 percent return on my portfolio. Is that reasonable?"

Wow. A client with reasonable growth expectations can be a rarity these days.

Michael George, founder of FPL Capital Management in Metairie, La., says one 64-year-old retiree came in with 250,000 dollars expecting to earn 15 percent a year and pull out 40,000 dollars annually for life. "A number of investors are looking at the S&P 500 like it's a money market fund yielding 15 percent every year," George says. "I wish that were the case." He generally follows Vanguard founder John Bogel's strategy of putting retirees 60 percent in stocks and 40 percent in fixed income to achieve a 8 percent to 9 percent expected return.

4) "You helped me beat the S&P 500 this year. Thanks."

For some reason, clients seem to notice when their investments lag the market, but they may not always be aware of when they outperform the indexes or other benchmarks. It's up to reps to enlighten them, says Salomon Smith Barney rep Eugene Pitra in St. Louis.

"That's one thing that surprises me," Pitra says. "Until I tell [clients], they don't have a very clear understanding of what their returns have been."

George recently started including the performance of the S&P 500 on his clients' quarterly reports to show their progress. "We owe it to ourselves to remind clients that we are doing a good job so we can get those phone calls we really want--referrals."--Nicole Coulter

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