Planners Back Increase in Fixed-Income Instruments After Crash

Some advise their clients to play defense, or to move away from equities.
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While officials sort out whether the crash of American Airlines Flight 587 outside New York's John F. Kennedy airport was an accident or yet another terrorist attack, investors have been calling their financial advisers today, asking whether they should reallocate the assets in their portfolios.

Financial planners are advising clients to keep their investments in both equity and fixed-income markets. However, they are suggesting a heavier weighting in bonds, real estate investment trusts (REITs) and a wide variety of stocks, to achieve a well-diversified portfolio.

But for the most part, financial planners say, investors aren't that rattled by this morning's plane crash. Indeed, they seem to be growing accustomed to the current turbulent times.

"There's very much a concern about volatility

in the markets -- but people do believe in the American economy and cycles," says Howard Weiss, senior vice president in the wealth strategies group at

Bank of America

(BAC) - Get Report

. "There's just a concern about how long it will take."

James Cotto, managing director of First Union Securities in White Plains, N.Y., reports that his clients are willing to stay the course, at least for now. "We are not selling at all," Cotto says. "We are going to wait and see what comes out of the news and the response of the American people. What the government and the

Fed

are doing are very positive for the economy and the markets," he adds.

However, Lee Rosenberg, a financial planner in Valley Stream, N.Y., is not so sure the economy will rebound in the fourth quarter of this year or the first quarter of next, the time frame most economists were giving for a bounceback before the terrorist attacks on Sept. 11. For Rosenberg, a key economic indicator will be retail sales on the day after Thanksgiving, which are long considered a benchmark for December holiday sales.

If the market doesn't recover by the first quarter of 2002, Rosenberg might recommend that his clients change their current 50-50 equity/fixed-income mix to 40-60, with a 10% increase in a diversified fixed-income weighting.

This would represent a dramatic change in his clients' equity holdings since Sept. 11. Before the attacks, many of Rosenberg's clients had as much as 65% of their portfolios in equities. That ratio has dropped to 50% since the first attacks, and if Rosenberg were to bring it even lower, to 40%, that would represent a total 25% decrease in his clients' equity holdings.

At worst, financial planners concur, apparent ongoing terrorist attacks will unsettle investors and consumers, delaying the economic rebound that was expected to come sometime in early to mid-2002.

As Rosenberg puts it, "We just urge all of our clients to be in contact often. This is not a time to be ignoring all of the market signals."

Meanwhile, financial planners are keen on a number of equity sectors, including such blue-chip standbys as

IBM

(IBM) - Get Report

,

Procter & Gamble

(PG) - Get Report

and

GE

(GE) - Get Report

.

"Look at those stocks that have been hammered but that are very important for the world economy," Weiss advises. "As they work themselves out, technology, for instance, should rebound quite nicely."

Pointing to defense stocks, such as

Northrop Grumman

(NOC) - Get Report

, Weiss says that defense is clearly a wise investment at this time -- in addition to beaten-down high tech. Technology will play a large role for spies in the current terrorist era, Weiss says. Specifically, he recommends

Intel

(INTL) - Get Report

,

Sun Microsystems

(SUNW) - Get Report

,

Cisco

(CSCO) - Get Report

and

Oracle

(ORCL) - Get Report

.

Other sectors that financial planners like right now include municipal and short-term bonds, telecommunications and health care. Citing lower interest rates, Rosenberg says he continues to like savings and loans and other financials. Likewise, he says that lower energy prices and the prospect of a cold winter increase his interest in utilities.

During these volatile times, the bottom line for investors is diversification. For his wealthier clients, Bank of America's Weiss suggests hedge funds, because these instruments tend to hold "real estate, REITs and alternative investments, which move counter to the market," he says.

Finally, financial planners note that in other times of war -- World War II, the Korean War, the Gulf War and even in the days following the first attack on the World Trade Center in 1993 -- the equities market declined only around 20%. Though financial professionals are uncertain as to when the long-awaited economic recovery will finally come to fruition, they are not expecting any drastic movement in the markets in the days ahead.