Historic bull market has advisers rethinking risk

Financial advisers reduce allocations to stocks, but keep aggressive buying on track

Aug 23, 2018 @ 1:52 pm

By Jeff Benjamin

With the U.S. stock market officially qualifying as the longest bull market in history earlier this week, financial advisers are rolling up their sleeves for what comes next.

The market's relatively unabated rally since March 2009, which has produced an S&P 500 Index gain of nearly 325%, is lengthy enough to spark a wake-up call for some advisers and investors.

"For people that have enjoyed a really nice run, we're starting to re-evaluate investment allocations," said Dennis Nolte, vice president at Seacoast Investment Services.

He cited one client who has seen his retirement account grow to $420,000 currently from $42,000 in 2009 thanks to an "incredibly aggressive investment strategy."

But as market milestones stack up, Mr. Nolte is now advising that client and others to reduce the risks in their current portfolio, while continuing to invest new money at the same aggressive levels.

"No one is panicking as of yet, and no one is saying they need to get out, and I wouldn't characterize client behavior as 'fat and happy,' either," he said. "Any additional funds we invest right now is with the idea that in three to six months, we could see a 10% to 20% decline."

Glenn Moore, an investment adviser at Gibraltar Financial, is also of the school that now would be a good time to rethink risk exposure and "take some chips off the table."

"We're trying to sequence and map where we think the economy might be heading," he said. "We're looking at the growth and inflation and the probability of continuing to beat those comps. If you start to see those numbers disappoint, we want to try and get ahead of it."

For Mr. Moore's clients, that means larger allocations to long-dated bonds, real estate investment trusts and staples.

"It's not to say the bull market can't go on, but given where we've been over the last eight quarters with economic growth, the risk of a surprise to the downside is increasing," he said.

Dan Sonnen, wealth adviser at Lauterbach Financial Advisors, said his firm has been "advocating for an allocation to uncorrelated alternative investments," such as market-neutral funds, reinsurance, alternative lending and options writing.

Ashley Folkes, divisional vice president at Axa Advisors, is reducing his clients' risk level by cutting allocations to equity in favor of more fixed-income investments.

But for new money going in, the assets are skewed toward higher-risk equity exposure.

"If we have a downturn, we will be dollar-cost-averaging in and buying stuff at a discount," Mr. Folkes said. "I'm still scarred from 2008 and the memory of seeing the faces of clients when we told them they have to put off their retirement."

Meanwhile, some advisers are continuing to treat the latest market peak as just another day of investing.

"We would argue that in the long run, the bears are always wrong," said Gerry Frigon, chief investment officer at Taylor Frigon Capital Management.

"Anyone who looks back over the past 100 years would have to admit that being a long-term bear would have been a huge loss," he said. "Investors should fight the urge to run under a rock every time the bears begin predicting disaster. This is not a game in which the bulls win some and the bears win some. Over the long run, the bulls always win."

Larry Luxenberg, chief investment officer at Lexington Avenue Capital Management, is also clinging to the long-term perspective.

"There are plenty of reasons why the stock market should be at a peak now with a bear market looming," he said. "But market movements tend to be unpredictable and we feel the best course for clients is to have a diversified portfolio and gauge their risk tolerance well. This way they can ride out any bear market while still enjoying the long-term upward movements of the stock market."

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