Retirement Watch

Prepare clients for the inevitable market correction

Have conversations now about repositioning retirement portfolios for a correction

Dec 8, 2013 @ 12:01 am

As 2013 draws to an end, and advisers and their clients reflect on the year, many would be forgiven for thinking the holidays have come early. After all, with major indexes up more than 25%, what's not to be cheerful about?

Yet before breaking out the eggnog and toasting to a great year, it might be good to review your clients' retirement plans.

Many analysts argue that the current market still has legs and may continue to rise well into 2014, while others believe that a correction is long overdue and investors should brace themselves for a pullback. Both are possible, but we don't believe in market predictions. What we do believe is that regardless of when a correction happens, it will eventually happen, and advisers should be ahead of it.

Consider the following:

• The last two bull markets lasted an average of 4.5 years. The current cyclical bull is at 4.75 years.

• The average mean return of the last two bull markets has been between 127% and 150%, depending on the index. The current run is 166+%.

• The average Shiller price-earnings ratio is 16. The current Shiller P/E is 25.

• Tobin's Q, a ratio of market value to the asset value of the S&P 500, is 1.02. That is 50% higher than its historical mean, and since 1950, the only time it has been higher was during the tech bubble. It didn't even reach that level during the housing bubble.

None of this should send investors sprinting to the sidelines, but history has a tendency to repeat itself, and these statistics put a slight damper on the current market euphoria. So assuming that the market pulls back at some point, what should advisers be doing with their clients' retirement assets?

For starters, sit down with clients. It's a good practice to meet with them at the end of every year, but with market clouds looming on the horizon, it's especially important right now.

With 2013 shaping up to be a banner year, this year's conversation will likely be a pleasant one. One thought is to use this new good will to your advantage and encourage clients to consider taking some money off the table and moving it into more-conservative asset classes. They may miss some market gains, but wouldn't that be preferable to a steep loss in account value?

Second, beware of fixed income. Investors have long used fixed-income strategies to protect against market pullbacks, but with rates at practically zero, they really have only one way to go — up — and when rates rise, fixed-income investments share the pain with equities.

Most investors have never experienced a persistent rising-rate environment and a bond bear market. For this reason, you should consider other ways to protect portfolio value when the next bear market hits.

Focus on risk control. No investment is bulletproof, but certain strategies do hold up in declining market conditions better than others. Discuss with clients investment options that are designed to protect them during a correction. This can include alternatives such as absolute return, real estate or commodities, which typically generate non-equity-based returns. Also consider defensive strategies with flexible equity components that allow for adjustments in equity exposure within the portfolio, based on market risk levels.

Diversify beyond asset class. As we learned in 2008, asset classes often move in sync, especially during periods of market and economic stress, and they don't always offer the level of protection and safety that investors have come to expect. That's not to say that we're expecting another 2008; far from it. But diversifying beyond asset classes into truly noncorrelated investment strategies can help provide portfolio protection.

Finally, it's imperative to stress to your clients that mitigating the emotional aspects of investing is the key to long-term success. Markets will continue to move up and down over time, and as these down markets take place, our instinct to make dramatic conservative decisions is almost always wrong. Keeping this emotional component in check and recognizing its negative impact may prove to be the difference between long-term success and failure.

Brad Thompson is chief investment officer, and Jeff Keller is vice president and director, of defined-contribution sales at Stadion Money Management.


What do you think?

View comments

Recommended for you

Upcoming Event

May 14


Retirement Income Summit

Join InvestmentNews at the 13th annual Retirement Income Summit—the industry’s premier retirement planning conference.Clients and investors continue to search for retirement income solutions and personalized investing advice. This... Learn more

Featured video


Why millennial demand for ESG is falling on deaf ears

Editorial director Fred Gabriel and senior columnist Jeff Benjamin say there's a disconnect between the big appetite for environmental, social and governance funds in 401(k) plans and their offering.

Latest news & opinion

Principal-Wells Fargo retirement deal would be among largest ever

Acquisition would be in line with trend of record keepers seeking to gain scale to combat fee reduction.

ESG options scarce in 401(k) plans

There's growing interest among plan participants, but reluctance to add funds that take into account environmental, social and governance factors persists.

Ameriprise getting ready to launch its bank

Firm's advisers will soon have access to lending products such as mortgages.

Envestnet acquires MoneyGuide for $500 million

Deal will allow Envestnet to deepen integrations between MoneyGuide and its other wealth management solutions.

Genworth move could signal big shift in distribution of long-term-care insurance

Insurers may turn to direct-to-consumer sales only, bypassing brokers and insurance agents.


Hi! Glad you're here and we hope you like all the great work we do here at InvestmentNews. But what we do is expensive and is funded in part by our sponsors. So won't you show our sponsors a little love by whitelisting It'll help us continue to serve you.

Yes, show me how to whitelist

Ad blocker detected. Please whitelist us or give premium a try.


Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print