The extended rally in stocks has led financial advisers to take steps to prepare portfolios for a pullback.
Advisers are also actively helping clients curb their enthusiasm — and fears — about the new peaks in the Dow Jones Industrial Average.
The Dow industrials closed above 15,000 for the first time last Tuesday and closed last Friday at 15,118.49, up 1% for the week.
Some advisers are building up client cash stockpiles and moving larger portions of client portfolios out of equities.
In fact, $4.3 billion flowed out of stock mutual funds over the seven-day period ended May 1, according to the Investment Company Institute.
That is the first time that the sector has seen outflows all year.
“People are kind of spooked from what happened in 2008 and saying, "I'm not getting fooled again,'” said financial adviser Paul LaViola of RTD Financial Advisors Inc.
He is recommending that clients take profits and sock away the cash they will want access to over the next two years in highly liquid accounts.
Mr. LaViola is also doing some re-balancing into short-term bonds.
Jeffrey R. Miller, chief investment officer of Armor Investment Advisors LLC, said that he isn't selling equities now, but he isn't reinvesting interest and dividends into them, either.
Those payoffs are going into short-term fixed income and short-term corporate investments.
The firm had already trimmed its long-term bonds over the past year, Mr. Miller said.
He is still investing new money into equities, but very carefully.
For instance, emerging markets have trailed the U.S. equity markets substantially over the past four months, suggesting that there is more value to be had there in the long term, Mr. Miller said.
“We're still making some equity investments, but being slow and deliberate about going into anything in the equity space,” he said.
In reaction to phone calls from investors and as part of regularly planned portfolio reviews over the past month, advisers have been warning investors to expect a pullback. Part of the message is positive — reminding clients that they have already benefited from the run-up.
“I try to take the emotion out of investing by focusing on valuations,” said Jeremy Kisner, an adviser and president of SureVest Capital Management. “I tell them to tune out all the stories in the news.”
"5% TO 10% CORRECTION'
Over the past month or two, clients have worried that the U.S. equity market is rising so fast that it is destined to crash.
The market will go down, Mr. Kisner tells them, but not in the way it did in 2008.
“We definitely could and probably will have a 5% to 10% correction,” he said he tells clients. “But I think you are worried about having another 2008, and I don't think it will happen.”
Mr. Kisner backs up his declaration with the following logic: Equity valuations are responsible; company balance sheets are stronger than they have been in decades; the U.S. economy is growing, if slowly; and U.S. companies are growing even more because they are exporting goods to China, India and other countries.
He also reminds clients that their portfolios are hedged so that there is built-in protection for any downturn greater than a typical 5% to 10% correction.
The Dow industrials are up about 15% for the year (25% over the past 52 weeks), and up 6% over the past two months.
“We tell clients, "Yes, the markets are reaching all-time highs, but we anticipate a pullback that would be healthy for any markets,'” said John West, an adviser with Spraker Wealth Management Inc. “Markets can't continue to go up every day.”
Mr. West also reminds them that the firm regularly takes profits for clients.
AN EVEN KEEL
A 40% rise on any investment touches off a conversation among Spraker's financial professionals about whether it is time to take the gain and reinvest the funds elsewhere.
Over the past three months, the firm has sold shares in Altria Group Inc. (MO), Ford Motor Co. (F) and The Procter & Gamble Co. (PG), according to Mr. West.
Clients who have been with the firm for a decade or longer are easiest to keep on an even keel, he said.
New clients in the past year typically are almost all in cash because they have been out of the market for four or five years.
“With those clients, we are tempering expectations and explaining that when we get a pullback, we will start putting a percentage of their cash back to work,” Mr. West said.
Lili Vasileff, a financial adviser and founder of Divorce and Money Matters LLC, said that a large client recently e-mailed her asking what she thought about “the bubble,” and included a link to a video that was “full of gloom and doom.”
She reminded the woman that her diverse portfolio is designed based on historical performance in both bull and bear markets.
Ms. Vasileff also told her that any holding that declines 2.5% is re-evaluated to see if any changes are needed.
Ms. Vasileff doesn't contact clients with market news because she has found that the action itself causes them to ask if they should be afraid. Instead, she sends out a monthly newsletter with information about other issues.
Scott Brewster, president of Brewster Financial Planning LLC, said that he hasn't heard much from clients.
“I think clients are holding their breath and afraid to mess up the recent good fortune.”
