I had the opportunity to attend SIFMA’s Senior Investment Forum this week. It was an industry seminar focused on cognitive impairment (dementia, Alzheimer’s disease and related ailments). The timing was somewhat ironic given that on the same day of the conference, the family of Malcom Young—the founding member of Australian rock band AC/DC—confirmed the reason for the guitarist’s retirement: dementia. (I’m listening to some of his work as I write this.)

A positive takeaway from the conference is the investment industry’s awareness of the problem. Some firms have set up protocols, implemented training programs, or are otherwise are educating employees about identifying and working with clients showing signs of cognitive impairment. Wells Fargo Advisors distributes a pamphlet entitled “A Quick Reference Guide for Elder Financial Abuse.” Ameriprise Financial gives its financial advisers a “compliance snapshot,” which has guidance for working with clients believed to be “experiencing diminished mental capacity.” Bank of America Merrill Lynch has a director of financial gerontology. Cynthia Hutchins, who holds this role, believes this is the first such position of its kind.

Now, the bad news. Resolving problems with investors who are believed to be cognitively impaired is difficult and complicated. When a problem is suspected, the industry’s best response right now is to delay requests for withdrawals as much as possible while notifying supervisors in the firm and reaching out to local and state authorities and agencies for assistance. (Exceptions are made when there is a clear financial need, such as an electricity bill or taxes.) An investment firm can contact state agencies and law enforcement (and many do), but if a person has legal authority to make a withdrawal, the firm is in a tough spot.

Adding to the difficulty are clients who refuse to accept the fact that they are being victimized. One panelist told a story about a client of his firm who thought she had won about $20 million from the Publisher’s Clearing House sweepstakes and needed to withdraw approximately $100,000 to cover the taxes. Neither her financial adviser, the firm’s compliance department nor local law enforcement could convince her that she was being scammed. Fortunately, in this instance, the crooks were caught before they swindled the woman out of her savings.

While it is a positive to see industry professionals being trained, they cannot perceive changes in customers they don’t regularly interact with. One speaker brought up electronic banking as an example. Online banking and ATMs are convenient, but there is no regular human interaction to spot a customer whose cognitive skills are declining. It would have been interesting if a representative of an online brokerage firm was on one of the panels, but unfortunately, this was not the case.

There are steps you can take. Some firms are now asking clients for an emergency contact. This is a person who can step in and be an advocate for an investor should he or she be suspected of having cognitive impairment or otherwise have diminished capabilities. I would contact both your bank and brokerage firms to see if it is possible for you to list such a person. Rick Fleming, the director of the SEC’s office of investor advocate, raised the possibility of requiring the person with power of attorney to clear his or her actions with a separate party. You could, for example, require your son or daughter to report periodically to your CPA or estate attorney. Exercise helps reduce your chances of experiencing significant cognitive decline. Social interaction reduces the chance of fraud. FINRA is seeking public comments on a proposal governing whether brokerage statements should be sent to investors who are disabled, incapacitated or living in a nursing home. Contact FINRA if you have an opinion you’d like to share. Finally, I’ll give you one of my suggestions: have a written emergency plan for the steps someone you trust should take in the event you are no longer able to manage your own finances.

• Aging and Investing; The Risk of Cognitive Impairment – David Laibson of Harvard University explained how declines in cognitive abilities affect financial decisions.
  
• Dementia and Financial Decision Making – The decision to turn over finances to one’s spouse often occurs after people develop difficulties managing money.
  
• What Are You Doing to Protect Yourself Financially Against Cognitive Decline? – Tell us on the AAII.com Discussion Boards.
  
• What Are You Doing to Protect Yourself Financially Against Cognitive Decline? – See how members responded on the AAII.com Discussion Boards.
  

Third-quarter earnings season will officially start. S&P 500 member companies scheduled to report include Yum! Brands (YUM) on Tuesday; Alcoa (AA), Costco Wholesale (COST) and Monsanto (MON) on Wednesday; Family Dollar Stores (FDO) and PepsiCo (PEP) on Thursday; and Fastenal Company (FAST) and Progressive (PGR) on Friday.

There isn’t much on the economic calendar. The minutes from the September Federal Open Market Committee meeting will be released on Wednesday and September import and export prices will be released on Friday.

The Treasury Department will auction $27 billion of three-year notes on Tuesday, $21 billion of 10-year notes on Wednesday and $13 billion of 30-year bonds on Thursday.

Pessimism among individual investors about the short-term direction of stock prices rose to a three-month high in the latest AAII Sentiment Survey. Neutral sentiment also rose, while optimism fell to its lowest level since early August.

Bullish sentiment, expectations that stock prices will rise over the next six months, fell 6.4 percentage points to 35.4%. The drop puts optimism at its lowest level since August 7, 2014 (30.9%). It also ends a seven-week streak of bullish sentiment readings above the historical average of 39.0%.

Neutral sentiment, expectations that stock prices will stay essentially unchanged over the next six months, rebounded by 3.7 percentage points to 33.7%. The historical average is 30.5%.

Bearish sentiment, expectations that stock prices will fall over the next six months, rose 2.7 percentage points to 30.9%. This is the highest level of pessimism registered by our survey since August 7, 2014 (38.2%). The historical average is 30.5%.

Pessimism has risen by a cumulative 7.9 percentage points over the past two weeks as the S&P 500 has retreated from its recent highs. Though individual investors felt more cautious this week, it should be pointed out that this is just the eighth time in the past 12 months that pessimism is above its historical average. 

In addition to the recent weakness in stock prices, prevailing valuations, events in the Middle East and Ukraine, the pace of economic growth and Washington politics are weighing on investors’ moods. Keeping other individual investors optimistic about the short-term direction of stock prices is the S&P 500’s overall upward momentum, earnings growth, sustained economic expansion and the Federal Reserve’s tapering of bond purchases. 

This week’s special question asked AAII members how the performance of small-cap stocks is affecting their six-month outlook for the overall stock market. Responses were mixed. The largest group, 40% of all respondents, said the weakness in small-cap stocks was not having any impact. Some of these respondents said they don’t invest in small-cap stocks or don’t view them as being a leading indicator of market direction. Slightly more than 16% of respondents viewed this year’s returns for small caps as a bearish sign for the broader market. An additional 7% of respondents said the decline in small-cap stocks has made them more cautious. On the other hand, about 10% of respondents thought small-cap stocks will rebound.

Here is a sampling of the responses:

• “I don’t feel you can gain insights into the market as a whole by looking at market segments in isolation.”
• “I hold very few small-cap stocks and only as speculative plays.”
• “I expect small-cap stocks to get better as the economy improves.”
• “It’s giving me reason for caution, so I’m cautiously optimistic as to the six-month outlook.”
• “I do not consider small caps as part of my analysis.”

Bullish: 35.4%, down 6.4 points
Neutral: 33.7%, up 3.7 points
Bearish: 30.9%, up 2.7 points


Bullish: 39.0%
Neutral: 30.5%
Bearish: 30.5%

Individual investors boosted their fixed-income and cash allocations last month, according to the September AAII Asset Allocation survey. Bond and bond fund allocations are at an eight-month high, while stock and stock allocations are at a four-month low.

Stock and stock fund allocations declined 0.6 percentage points to 66.7%. This is the smallest equity weighting since May 2014 (65.3%). Even with the decline, stock and stock fund allocations remained above their historical average of 60% for the 18th consecutive month and the 20th out of the past 21 months.

Bond and bond fund allocations increased 0.2 percentage points to 16.8%. This is the largest allocation to fixed income since January 2014 (17.0%). The historical average is 16%.

Cash allocations rose 0.5 percentage points to 16.5%. Even with the increase, September was the 34th consecutive month with cash allocations below their historical average of 24%.

After falling in the first half of the year, fixed-income allocations rebounded in the third quarter. Bond and bond fund allocations have stayed at or above 16% since yields on the 10-year Treasury started staying largely below 2.6% in early summer. Cash allocations have shown more variance over the past several months, with some of the fluctuations potentially being due to differences in which AAII members took the survey on a given month. Stock allocations have remained above 65% throughout 2014, aided in part by the market’s upward momentum.

The shift in allocations this month is subtle and does not appear to signal a shift in preferences. Many AAII members continue to be frustrated by low bond yields and low interest rates on money market accounts. Plus, optimism about the short-term direction of stock prices remained above average throughout September.

September’s special question asked AAII members how the record highs set by the S&P 500 index this year have influenced their allocation decisions. More than half (53%) of respondents said they have not altered their allocations in response. Nearly 20% of respondents said the record highs have either made them more cautious or prompted them to increase their cash allocations. Some of these members said they are favoring more conservative (large-cap, dividend-paying) stocks. About 5% said they have increased their equity allocations.

Here is a sampling of the responses:

• “I always adhere to the same allocation, regardless of market movement.”
• “It’s made me more cautious of a correction.”
• “I have started taking profits, and transferred 30% of my portfolio to cash.”
• “No, I’m normally close to 100% stocks and stock funds.”
• “I’m very hesitant to invest more heavily in stocks; still waiting for a healthy pullback.”
• “Staying with the plan from last year; just waiting for the opportune time to rebalance.”

• Stocks and Stock Funds: 66.7%, down 0.6 percentage points
• Bonds and Bond Funds: 16.8%, up 0.2 percentage points
• Cash 16.5%, up 0.5 percentage points

• Stocks: 33.9%, up 2.8 percentage points
• Stock Funds: 32.8%, down 3.3 percentage points
• Bonds: 4.2%, up 1.1 percentage points
• Bond Funds: 12.6%, down 1.0 percentage points 

Take the Asset Allocation Survey.

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