Eric Tashlein, managing partner with Connecticut Capital Management Group LLC in Milford, Conn., has addressed risk in client portfolio by shifting to a more value-centric strategy. While equity allocations used to be an equal mix of value and growth, the value portion has grown to the 70% to 75% level over the last three years.
Tashlein notes that value has historically displayed better performance in down markets, and thinks this provides clients with at least some sense of security. Dividend-paying value stocks, he adds, are a sound addition with the recent cuts in dividend taxes. "I think everyone is generally running scared. We still see people who are afraid to be in the markets," he says. "Some people are petrified of anything but a CD."
Diane Pearson, director of financial planning with Legend Financial Advisors in Pittsburgh, say the firm has been well served through the use of low-volatility portfolios it started using eight years ago.
The portfolios consist of a diversified mix of mutual funds with low correlation to the broader market. The funds include the Merger Fund, the Arbitrage Fund and the Market Opportunity Fund, which uses long-short strategies. "We're looking at the portfolio to provide bond-like volatility with standard deviation of 4 to 7, but still give equity-like returns in the high single digits or low double digits," Pearson says.
William Cafero, senior manager of wealth management solutions with Ernst & Young, worries that even with the traumatic events of the past few years, there's another hidden danger lurking for retirees: inflation.
"People forget that inflation risk has just a devastating impact on market results," he says. "Right now, people have been sort of lulled into a false sense of security."
This highlights the need for a mixed and balanced portfolio, and also is why TIPS may become a more popular investment vehicle as time goes on. Cafero also notes that real estate has provided some comfort to investors. He says many retirees are downsizing their homes and tapping into the extra equity without having to borrow against it. As an added bonus, they're tapping into historically low interest rates on their new mortgages. "That is a bonanza from a retiree's perspective," he says.
Bernie Kiely, owner of Kiely Capital Management Inc. in Morristown, N.J., isn't changing his approach despite the turbulence of recent years. But then his approach was always somewhat more conservative than most advisors. Kiely's typical client portfolio is equally split between a mix of equity and fixed income. The allocations include 10% in international stocks and 5% in REITs.
The average client had a gain of 22% last year, after losses of 4% in 2000, 3% in 2001 and 10% in 2002, Kiely says. "During the bear market we constantly rebalanced," he says. "People are now calling and saying, 'Thank you.'"
The bear market served to remind people just how dangerous equities can be, Kiely says, and that the stock market is "not a do-it-yourself proposition." He notes that if someone close to retirement had invested $1 million into large-cap growth stocks in 1999, they would have lost 45% of their money as of the middle of 2003. "That has to be scary, and it happened to millions of people," he says.