Investors are searching for alternatives to modern portfolio theory and are looking to such things as fixed indexed annuities and other alternatives, says Charlie Gipple, national director of index products for Genworth.
Other financial executives agree that those people leaving bonds because of the low interest rates are looking for alternatives, whether they are indexed annuities or other investments.
Gipple says advisors should tell their clients that the modern portfolio theory split of stocks and bonds may not be the best portfolio mix today.
“It used to be that when stocks went one way, bonds went the other. That was the beauty of modern portfolio theory of splitting investments between the two,” Gipple says. “But that is no longer true, and advisors should be telling their clients they may want to mix things up a bit.”
Investors may want to look at a split of bonds, stocks and indexed annuities so they have a guaranteed source of income to ensure that the bills get paid in retirement, no matter what the market does, he says.
“The key point is that modern portfolio theory has a few problems. Bubbles are going to continue to explode in the future, as they have twice in the last 14 years, and it would be nice to have some guarantees of income,” he adds.
Chris Cummings, managing director of client analytics group at Manning & Napier, agrees investors are looking for alternatives to the traditional risk-hedged portfolios.
Cummings advises investors not to lock themselves into any investment given the history of the market over the last few years. Investors may want to put some funds into high-yield bonds, some into real estate and some into dividend-paying stocks, he says.
“A zero fed policy cannot be maintained forever, but investing is going to be challenging for the next few years,” he predicts.
“Modern portfolio theory is not dead, but in order to address a person’s needs during a long retirement, they are going to have to do something different,” says Brian Levitt, senior economist with Oppenheimer Funds.