Who’s buying in this market?

If Warren Buffett were in charge of your practice, all your clients would be knee-deep in U.S. equities right now. The legendary investor revealed Friday that he’s converted his personal portfolio into nearly all American stocks, saying that in the next five to 20 years, most companies will see record profits.

While Buffett may be right — and he’s got a pretty good track record — he isn’t running your office, and the multibillionaire can afford to take some risks now and then.

The reality is that most retail clients aren’t scooping up cheap stocks, but rather selling or staying put. There are a number of wide-eyed investors, though, taking a Buffett-like approach and sinking new dollars into the market.

Valerie Chatain-White, a Winnipeg-based CFP, says that while most of her clients are staying put, a handful are jumping into the market. “They’re buying global growth funds for the most part,” she says. “They understand that it’s a global world and they want to be positioned for the next upsurge in the market, whenever it is.”

She adds that it’s the “smart ones” who are buying, because they understand the advantage of buying low.

Peter Ficek, a Calgary-based CFP, reveals that about 20% of his client base is investing now. He says it has more to do with rebalancing portfolios than anything, but still, people are seeking out deals.

He says most of his clients are putting their money in Canadian equities, fixed equities and European equities, though a few are taking a chance, like Buffett, on the U.S. market.

“For a person who is sitting with a window of about five years, they should do well in the U.S. equity market,” he explains. “It has to do with having a longer time horizon and feeling comfortable about allocating the portfolio towards more American exposure.”

It seems like investing in such a decimated market would be a no-brainer to many investors, but most clients aren’t making moves. Chatain-White says the ones who are spending money are younger, with a longer time horizon.

However, she adds that a number of her 50-something clients are investing, too. “They understand that they’re going to live a long time,” she says. “They’re not in panic mode, and they understand that it’s about layering and lattering the income.”

Ficek agrees that it’s his younger clients — especially those in their late 30s and 40s — who are more eager to invest. “Some of these investors are more astute than say those that are in their 60s,” he says. “They’re more plugged into what’s going on. They can see that the S&P is below the 1,000 mark; they can see that the prime rate is being dropped around the world.”

Older clients, and others who aren’t investing, are still scared about the future. Ficek says they see the sensational headlines on the news, and panic. “The average investor is quite worried, so they’re holding cash,” he says.

Another reason why some people may not be taking advantage of the market downturn is that they don’t have enough cash. Chatain-White is encouraging clients to use whatever extra money they have to pay down debts. “Debt reduction is the whole issue right now,” she says. “It’s the credit crunch. Sure, interest rates are low, but if you have cash right now, pay off those debts.”

Using asset allocation rebalancing is one way to encourage a client to invest during a market downturn. Because bonds are up and equity is down, a lot of portfolios have shifted. “Look at a portfolio that was originally 60% stocks and 40% fixed income,” says Ficek. “Now it has way more fixed income than it’s supposed to have. What you need to do is take money from fixed income and move it over to equities.”

Ficek adds that it comes down to dollar-cost average. Moving assets into a money market doesn’t make much sense from that perspective. Still, it’s important to move slowly. “The best thing you can do right now is to dollar-cost average over a period of time rather than jump straight into this very volatile market. If you have money sitting in fixed income, the best thing to do would be, rather than moving it all in equities, to move it once a week onto the equity side.”

Many fund managers are also looking to buy. David Burrows, president of Barometer Capital Management, says at the beginning of last week they were holding 90% cash. That number has come down to about 50%.

While his business model forces him to track the breadth in the markets, and, when it’s contracting, to pull out of their positions, he’s still scouring the markets for a good investment like every fund manager should be doing.

His mandate is to find companies that are going through positive changes. They have to be technically sound and the price performance has to be strong relative to the market itself. Because of these guidelines, the companies that Burrows has purchased recently haven’t been down as much as some other businesses, but he’s still managed to find more than a few bargains.

Burrows’ main investments have been in staple companies such as General Mills and Ralcorp, and healthcare companies like Johnson & Johnson and Baxter.

“We’re buying concentrated large-cap U.S. names,” says Burrows. “These companies have been in a multi-year bear market. Most of the companies we’re purchasing have tripled earnings since 2000, but made no price appreciation. Now they’re working their way higher against a very difficult market.”

Although Burrows mainly invests for private clients, he does have advice for the average investor. “Protect the downside risk,” he says.

In other words, taking it slowly and waiting it out long term may not be the best strategy. “They need to have a disciplined selling strategy,” Burrows adds. “It’s time for active management. You have to stay on top of positions and exit them if things don’t look good. You can’t just buy things and put them to rest.

“Being tactical becomes much more important than buy and hold.”

Filed by Bryan Borzykowski, Advisor.ca, bryan.borzykowski@advisor.rogers.com