Long-always investment advisors, brokers, planners and most fund managers are paid most when they keep their clients holding equities. Moving out of equities is financially detrimental for the advisor/managers. For this reason the money business has grown to adopt a religious zeal for the idea of constant equity allocations. When the economic climate begins to contract and stock markets begin their predictable decline, this presents an inconvenient annoyance for the buy and holders. Clients start reacting badly, and sales managers and head office start peppering the advisors with materials on how to keep their clients in “the market”: “Communicate! call your clients, hold their hand. Tell them to stay the course, but don’t let them sell!”
I ran into my carpenter on the street a couple of weeks ago outside of his bank. He told me he had just been in to see his financial advisor and had asked that he sell some of his equity mutual funds to raise some cash and protect himself from the current bear market. “She told me, no, ” he said, “she said she was too busy to see me today anyway but that I could not sell.” Here he was standing outside on the curb like a child who had been chastised. His gut instinct had been to protect his savings, but the “expert” had shut him down. I felt bad for this hard-working man, “just whose money is it” I asked him.
I have heard this same story for months now. Far from getting any pro-active advice from their advisor or manager, those who seek to protect their capital, usually have to go through a series of uncomfortable, even confrontational meetings to get their instructions followed. It is sickening and underlines why most money types are working for themselves and their firms, much more than for their clients.
Most often the only solution offered for defence in a bear market is the idea of buying dividend paying stocks. But here is the truth: dividend paying stocks do not protect capital from a bear market. Dividend paying stocks fall less, but they still fall in value a lot. This article from James Bianco of Bianco Research explains the facts well: Dividend Investing (via The Big Picture).
Here is a picture of what dividend stock out-performance looked like during the 2007-2009 bear market, dividend paying stocks returned -35.74% versus -46.10% for the S&P Equal Weight Index.
Here is the picture of what dividend stocks have done year to date versus the overall market: on an annualized basis dividend stocks have returned -18.34% versus -34.30% for the S&P Equal Weight Index.
Is this your idea of capital protection?