For all the bad news causing turmoil in the stock market, some wealthy investors are seeing a silver lining in the form of a buying opportunity. While investors have been broadly fleeing the market recently in favor of cash, many of the wealthy are being advised to maintain their equity position, or to buy.
But it's a risky proposition to assume that a market drop creates buying opportunities. "We are skeptical of analysts' estimates of forward earning, especially if growth in the developed countries continues to slow," says Brent Fykes, senior investment partner at multifamily office GenSpring. "And we don't make allocation calls on the recent past in stock prices."
Tuesday afternoon, the Dow Jones Industrial Average was down 4.85 percent for the year and the S&P was down 8.93 percent. But many analysts maintain we're in for a market rally during the second half of the year. Characteristics of this downturn are not like the slide in 2008, they say, because so many factors are different. Back then, banks were lending beyond their means and Americans were carrying way too much debt.
"We don't feel like this a 2008 redo just yet," agrees Fykes. "But obviously it could change with the debt issues in Europe, which could be contagious to their banking system and then on to the global banking system."
Some advisers feel that the price-to-earnings ratio of large stocks in the S&P 100 index is so much lower than the same ratio in the Russell 2000 Index of small stocks (12 versus 33) it creates a buying opportunity for large-cap stocks. But Fykes advises caution.
"The risk still outweighs the reward when allocating capital to equities for wealthy clients. Long/short equity, global fixed income, non-directional hedge investments (also called absolute return funds because they are designed to produce a return no matter what the market is doing) and managed futures appear, to us, to be much better risk/return tradeoffs in client portfolios today," he says. "When we get the improving fundamentals and measurable cheapness, we will allocate greater capital to equities."
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