Investors are taking a level of risk not seen since 1999 and 2007, and financial advisers should restrain the impulse of clients to boost sagging returns.
Martha G. King, who oversees Vanguard Group Inc.'s adviser-sales division, said investors have taken on the highest stock exposure in their portfolios since the years preceding two recent market routs.
“I do see some advisers adding risk to their portfolios to provide yield substitutes for those old reliables that aren't delivering what they wanted, and that's worrisome,” said Ms. King in an interview on the sidelines of the Inside ETFs conference in Hollywood, Fla.
“We need to either adjust goals or to invest more,” said Ms. King. “I don't hear enough advisers saying it."
Ms. King, echoing the remarks of fund companies from Pacific Investment Management Co. and T. Rowe Price Group Inc., said advisers are facing the prospect of capital markets that will simply offer less appreciation than in years past. But adding risk isn't the answer, she said.
The proportion of investor assets tracking equities is as high as it has been since it topped 60% in the periods preceding years in which the markets delivered negative returns.
To generate its analysis, Vanguard examined Morningstar Inc. data on assets held in mutual funds, money-market funds and exchange-traded funds between 1993 and 2014.
The numbers may reflect a choice to add stock exposure by adding funds such as those that attempt to capture dividend yields as a substitute for diminishing bond fund yields.
Vanguard's research also showed that bond portfolios have taken on more exposure to lower-credit debt, which offer investors juicier yields but also may track the return patterns of stocks, reducing their value as a strategy to reduce risk.
Vanguard argues that the “primary" purpose of bond exposure is not income generation but portfolio diversification, according to Jim Rowley, an ETF specialist in Vanguard's investment strategy group.
The data could also reflect increased value of stocks following a six-year bull market.
Many advisers seek to “rebalance” portfolios after price increases, in this case cashing in some stock-fund shares and buying bonds, but investors may be reluctant to do so this time because of a widely-predicted rise in near-zero U.S. interest rates. That increase could erode the value of some bonds.
A number of analysts and advisers are recommending more-exotic bond strategies, stock strategies and alternatives to manage that risk.
While negative returns in bonds are possible, the "magnitude of losses" in the bond space pale in comparison to the effects of downside volatility in stocks, according to Mr. Rowley.
Not all analysts are sanguine about the bond risks in the traditional “balanced” portfolio.
Brett Hammond, the head of multi-asset class and alternatives applied research at MSCI Inc., on Wednesday proposed turning to low-volatility stock funds “to help immunize the portfolios against downside risks.”
He was challenged on that recommendation by Elisabeth Kashner, the moderator of his panel at the conference. Citing performance statistics on iShares MSCI USA Minimum Volatility ETF (USMV), she said the products are highly correlated to the markets when they move down.
Mr. Hammond said equities are the primary source of risk in most diversified portfolios, even those that make extensive use of bonds and alternatives. While low-volatility strategies can be correlated to the broader market, they can also help limit how much value those portfolios lose in a market rout, he said.