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Good or bad, greed is back

Old-fashioned greed is making a comeback.

Financial advisers, who say that a growing number of formerly wary clients are becoming dangerously aggressive, worry about clients making more ill-timed bets.

Several factors appear to be at play with this newfound greed.

For one thing, investors who missed the run-up in the market are wracked with regret. Compounding that feeling is the fact that clients are getting almost no return on cash holdings, advisers say.

“It’s like a light switch just went on,” Kathy Klein, portfolio manager at Marietta Investment Partners LLC, said about the change in investor mood.

Some clients “are irate about -having 10% to 15% cash in their accounts, even though the last conversation we had was about having [minimal] risk” in their portfolios, she said.

EARNING IT BACK

These clients have “an aggressive desire to recoup losses,” said Ms. Klein, whose firm manages $350 million in assets.

Derek Holman, managing director at Enright Premier Wealth Advisors Inc. agreed.

“People are now trying to earn back what they’ve lost. They’re not worrying about the risk — they’re [looking at] how to make money as opposed to protecting it,” said Mr. Holman, whose firm manages $750 million.

Investors are feeling a “slight euphoria,” said Thomas McGuirk, principal at Martin Thomas Wealth Management LLC, which manages $100 million.

They “definitely feel the world [economy] is looking more positive and want to get back in [the stock market] as soon as possible,” he said.

Not only do investors want to make up lost ground, but the 4% dividend available with some stocks looks much more attractive than sitting in cash, Mr. McGuirk added.

But these newly bullish investors could, once again, be dead wrong in their timing.

Advisers note with some irony that the emerging sense of greed comes after the S&P 500 has risen 56% from its March low. When clients start wondering whether it is time to get back in, that is usually a negative for the market, they say.

And many financial professionals are concerned about the strength of the economic recovery.

“We’re a little bit more cautious” than some clients, Mr. McGuirk said. “Fundamentally, the world hasn’t changed that much.”

The attitudes that advisers are seeing with clients isn’t unexpected, given the “emotional roller coaster” that investors have been through, said behavioral-finance expert Andrew Lo, a professor of finance at the Massachusetts Institute of Technology.

“Now they have lot of regret” after missing the rally, he said.

Investors suffer from “hindsight bias,” said Hersh Shefrin, a professor at Santa Clara University’s Leavey School of Business and a researcher into behavioral finance.

Prior market movements “look much more predictable than they were” in real time, he said. “The run-up looks much more inevitable now than it was months ago.”

Investors incorrectly assume that recent trends will continue, Mr. Shefrin added, so “investors are feeling comfortable now because the market has been hot.”

For their part, advisers are trying to talk clients out of making hasty allocation decisions based on emotions.

At the same time, many advisers say that clients are overweighted in cash, and advisers are figuring out the best way to get some of that money back to work.

“We’re still cash heavy” said Mr. McGuirk, with 15% to 20% in cash, versus a normal 5% to 10% allocation.

“We’d use [that cash] if we get a big pullback,” he said.

But so far, the market has held up.

DOLLAR-COST AVERAGING

“I definitely have cash to put to work, and I know where I want to put it,” said Ms. Klein, who has also been waiting for a correction.

“In a situation like this, if a client is [investing with existing] cash, I would dollar-cost average into the market, and slowly get them to their allocation,” Mr. Holman said.

Averaging in might work well. The market will probably remain volatile, said Mr. Shefrin, noting that “high volatility breeds high volatility — that’s really strong in the [research] data.”

As a result, advisers will need to keep playing the role of therapist.

“Most investors will feel a sense of remorse, either way” as they miss opportunities, Mr. Shefrin said.

E-mail Dan Jamieson at [email protected].