Back in the depths of the financial crisis, if you had predicted that U.S. stocks would recover and post an additional 20% in gains from precrisis levels by 2013, people would have shaken their heads.

The historic bear market of 2008–2009 revived talk of the Death of Equities, the belief that investors had become permanently scared of stocks.

But two consecutive years of strong equity returns seem to have made a lot of investors forget their pain. They started pouring money into stocks, despite concerns raised by Vanguard and others that valuations appeared rich.

Already this year, we’ve seen the market back off a bit from some of those gains, which may increase investor anxiety. But this makes it a great time for you to show your value as an advisor. You are the emotional circuit breaker, steadying investors’ so that they can reach their investment goals.

Chasing performance is an eternal temptation and a behavior that can disguise itself. The flight to bonds that began with the stock market downturn in 2008, for example, has often been described as a flight to high-quality investments.¹

FixedIncomeFlows_022014

FederalFunds_022014

But as you can see from these charts, which show massive amounts of cash flowing from money markets into riskier corporate and other bonds as interest rates fell over the last six years, this behavior looks a lot more like reaching for yield than derisking.

Similarly, during the 2008–2009 bear market, investors’ global equity allocations shrunk to 38%. Until recently, it looked as if many investors might give stocks the cold shoulder forever. But slowly—and, more recently, rapidly—investors have rediscovered their appetite for stocks. At the end of 2013, investors held 58% of their assets in equities, higher than the 20-year median allocation (see chart below) of just over 50%.

IndustryFundAUM_022014

Sources: MSCI, Barclays, and Morningstar, Inc. Data through December 31, 2013.

It’s tempting to follow the crowd, but this is a period that reinforces the value of discipline.

With the Standard & Poor’s 500 Index up more than 30% last year, now may be the perfect time to review clients’ asset allocations and remind them of the importance of sticking to their plans.

Successful advisors manage so much more than money. You manage people and their expectations. When clients are scared about market drops or overly enthusiastic about market increases, you stop them from overreacting and potentially making poor choices.

The markets may well be at another crossroads, which can make this a good time to meet with clients to review the reasons behind their long-term asset allocations, consider rebalancing, and discuss the wisdom of avoiding the great temptation of any rotation.

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1 High-quality Investments are generally fixed income securities that are rated the equivalent of Baa3 and above by Moody’s

Notes:

All investing is subject to risk, including possible loss of principal.

Investments in bonds are subject to interest rate, credit, and inflation risk.

Past performance is no guarantee of future results.