Whipsawn by stock market turmoil and the global credit crisis, retail clients have been fleeing in droves to the shelter of money market funds.

The Investment Funds Institute of Canada says a record amount poured into money market funds during January and February, the last two months of the recent RRSP season. Net sales totalled more than $8 billion in the period, almost 60 times the level of a year earlier.

The flight to the sidelines has gone well beyond this season’s RRSP contributions. Bill Bell, president of Aurora-based Bell Financial Inc. , says a couple of clients have insisted on converting their entire portfolios to cash and plan to sit tight until they feel more comfortable.

He’s concerned clients with big cash holdings will remain paralysed, whether the market goes down another 20% or up another 50%. “When people let emotions dictate their decisions,” he says, “they often run into problems.”

So, if clients are sitting on bags of cash, here are a few strategies to get them back into the market.

> Dollar-Cost Averaging. Bryan Snelson, vice president with Raymond James Ltd. in Mis-sis-sauga, Ont., is not waiting for a green light to indicate the market has hit bottom. Instead, he is taking an incremental approach through a dollar-cost averaging plan stretched out over several months.

“We are working our way into securities a little bit at a time, and not making any sudden moves,” Snelson says. “If there’s downside volatility, averaging in allows us to take advantage of the dips and, if there’s a recovery, at least we’re put some money in at the low points.”

Toronto-based Hartford Invest-ments Canada Corp. has found a market for a new dollar-cost averaging product that allows clients to earn a high interest rate while averaging each month into a basket of Hartford funds over a period of either six or 12 months. With the six-month plan, clients earn a 7% annualized rate of interest on outstanding cash balances; the 12-month plan pays 4%. The DCA Advantage product captured 17% of Hartford’s sales in January and February.

“The high interest rate we’re offering is attention-getting,” says Mary Taylor, senior vice president with Hartford. “There is some comfort in putting money into the market systematically when we’re in this kind of zone. You never know where the market is going, and catching the bottom is difficult.”

Taylor says some clients are hedging their bets by putting a portion of their cash in both the six-month and 12-month versions.

> Limit Orders. Bev Moir, senior investment advisor with Toronto-based ScotiaMcLeod Inc. , is introducing her clients to “limit orders,” in which an order to buy a stock is fulfilled only when the stock falls to a specific price. She has talked to cash-heavy clients about what stocks they might find attractive if their prices drop further, and has entered limit orders.

For example, she says, the drop in bank stock prices has created a situation in which the dividend yield is close to the interest rate offered by guaranteed investment certificates. But bank stocks offer the potential for growth, as well as the dividend tax credit.

“If clients buy defensive stocks with a record of strong dividends, at least they are getting some income while waiting for the market to improve,” she says. “And if the market does change direction quickly, instead of missing out on the sweet spot, they are positioned to take advantage of the upturn.”

> Buying On Bad Days. Moir also suggests dividing available cash into four or five parts, then using one at a time to buy on any day that market indices are dropping. This strategy could apply to broadly diversified mutual funds or to individual companies that have dropped with the market.

“Many people are anxious, and I have to be careful not to push them beyond their risk tolerance,” she says. “But I don’t want them to miss out on opportunities.”

> Buying Guaranteed Products. Market-linked GICs, segregated funds and principal-protected notes protect clients’ capital, providing they are held to maturity. These products typically have higher fees than mutual funds because of the cost of their guarantees and various layers of administration. But they allow nervous clients to benefit from the equity market’s long-term growth while also protecting their principal.

@page_break@PPNs link their returns to underlying investments, such as mutual funds, key interest rates, stock or bond indices, or hedge funds. The primary attraction is that if the PPNs are held to maturity — typically, five to 10 years — the original nest egg will be protected, even if the underlying asset falls in value. If it increases in value, investors participate in the gains, although to a lesser degree than if they had simply held the asset itself because of the extra PPN fees. Guarantees are typically provided by a major bank or government agency, and the guarantor’s reputation is an important component of any PPN.

Market-linked GICs are similar to PPNs in that their returns are linked to underlying baskets of stocks or market indices — from broad market indices to narrow sectors such as financial stocks. The participation rate in the returns offered by the underlying asset vary, so it’s important to check the details of each product.

Segregated funds offer guarantees on most or all of the assets originally invested, provided a client holds for 10 years. Many offer “lock-in” features that allow the client to reset the guarantee at higher levels along the way. Bell says some clients are better off paying an extra 1% or so in seg fund fees to maintain the peace of mind that helps them stay committed to their stock holdings.

“Difficult markets bring to the surface how clients truly feel about risk,” Bell says. “A lot of the work we do as advisors is psychological. We must understand how our clients feel in order to help them, and then develop investment plans that will encourage them to stay put during volatile times and keep the portfolios on track.”

> Wrap Accounts And Packaged Portfolios. Timing decisions can be avoided by investing in wraps or fund-of-fund packages that allocate money automatically to undervalued asset classes. These fund packages may have a weighting in money market or fixed-income asset classes, but are not so heavily weighted in these areas that it will be difficult for clients to meet their long-term growth objectives.

All major fund companies offer versions of wrap programs, some of them consisting entirely of their own product line while others include mutual funds sponsored by competing companies. For example, for a minimum investment of $5,000, AGF Funds Inc. of Toronto offers a family of five fund-of-fund portfolios in its Elements program, in which it promises a management fee rebate of up to 90 basis points if the packages fail over three years to match the performance of the comparable benchmarks.

Using some of these products and investment strategies could alleviate pressure on advisors who are worried about putting their clients back into equities just in time for the market to take another dip.

“Advisors are afraid that if they recommend investing all of their clients’ cash in equities now and the market doesn’t hit bottom for another year, their clients may not be patient and could lose confidence in them,” says Dan Hallett, president of Windsor, Ont.-based Dan Hallett & Associates Inc. “There tends to be more regret when people actually lose money than when they simply don’t make the money that they could have.”

But, Hallett warns, if advisors allow clients to wait till they feel more comfortable to place cash into stocks, the market will inevitably be more expensive. The tendency to buy only when things look rosy usually results in buying at market highs and selling at lows, which is why most investors fail to capture the long-term performance of the funds they hold.

“Anyone who is waiting for that ‘cheery consensus’,” he says, “is going to pay for it.” IE