Advisor warns clients to guard against exuberance

FWR Staff

3 January 2007

Florida wealth manager says investors need to cling to sensible allocations. Despite the U.S. stock market's advances since the summer, investors need to resist the temptation to take chances with higher-risk equities, says one private-client investment advisor.

"It's amazing how quickly some investors are willing to jump ship and move from the relative safety of bonds toward higher-risk equities, based on such a relatively short period of gains," says Rick Gaines, managing partner of Gaines & Smith Financial Group. "Such impulses need to be restrained as a sharp stock market correction is not out of the realm of possibility."

Perspectives

While noting in mid December that there were no signs of "irrational exuberance" in the marketplace, Gaines is cautioning his clients, especially retirees dependent on fixed- income instruments, to stay with asset allocations designed for their specific needs and objectives, despite the sharp increase in equities recently.

"Some perspective is in order here," says Gaines. After all, he adds, a sharp increase in equity prices was a phenomenon of the last few months of a year that was basically flat overall.

But Tom Sowanick, head of research at Princeton, N.J.-based Clearbrook Financial, disagrees with Gaines. "Baby boomers should be concerned that interest rates are too low and will not provide the financial returns necessary to sustain lifestyle needs for a long stretch of time," he writes in a 3 January 2007 bulletin. "Expected returns from bonds should be no higher than 5% . Will a return of 5% or less suffice for a baby boomer about to retire at 65 years of age and expected live another 20 years?"

Adds Sowanick: "Since 1977, stocks have had double digit returns 76% of the time, whereas bonds provided double digit returns only 17% of the time."

Boca Raton, Fla.-based Gaines & Smith is an office of Jefferson Pilot Financial. -FWR