What he is trying to avoid, as part of his overall strategy, is buying the S&P 500 or any other fund whose manager is a closet indexer. "That's most mutual funds. They don't let cash build up," he says. "Frankly, if the S&P is down 10% to 20%, I don't care about beating it."

This is where the overvaluation in the stock market is clearest to Martin, who believes that keeping this flavor out of his portfolios will give his clients a leg up. One alternative he likes are focus funds, such as Franklin Templeton Utilities Fund, which takes a more focused approach to investing with far fewer stocks. The attraction of these funds is that the managers are willing to make far bigger bets on their best ideas and not worry about how they compare to the S&P 500. On the value side, Martin looks for funds that build their portfolios from the ground up like Longleaf Partners, Third Avenue Value and First Eagle Global.

Another tactic Martin uses to increase opportunities is to keep large reserves (about 35%) in cash and short-term bonds. "I don't think there is exposure in not being exposed to the potential upside of the S&P right now. This hunkers down the portfolio. The risk is we get another broad Bull Market and I miss out. But I'm not there," adds the long-time advisor.

Advisor John Ferguson, who manages about $50 million for 77 families, says his emphasis now is focusing clients on what they need. "They might only need 5%, 6% or 7% returns to achieve all of their goals. We tell them flat out that to shoot for a rate of return that is higher, it might mean that they're taking on undue risk."

In the last few years, Ferguson says he has become more knowledgeable about index funds, especially those built by Dimensional Fund Advisors (DFA). "While they're not strict index funds they do eliminate certain characteristics, like stocks in bankruptcy. It fits with our belief that the 50-year-olds or older need less volatility." Ferguson is also using I Shares and Vipers to lower standard deviation in client portfolios while enhancing potential returns.

He's been keeping equity exposure fairly constant. "If we're targeting 60% to 65% in equities, we're there until we make a lifetime allocation change. Our allocations are based on life goals and income needs, so unless those change, there hasn't been a reason to shift that," says Ferguson, who is president of Ferguson Asset Management in Potomac, Md.

He has made changes on the bond front, however. For one thing, Ferguson is not extending maturities and has significantly decreased his portfolio's exposure to ten-year bonds. He uses individual bonds and bond funds, including funds from PIMCO, Fremont and DFA, but he shuns junk. He's also steering clear of individual municipal bonds, because of the need to buy long-term maturities. "You're almost better off in Treasuries at this point."

Ferguson, like many advisors we talk to, reports that preretirees are beating a path to his door. In the past year, he says he's gotten more new and higher-net-worth clients than ever before (typically with assets in the $650,000 to $700,000 range). They also seem more sophisticated and realistic. "Where they've been prone to postpone getting their affairs in order before, in terms of trusts and other documents, now you can push them a little bit," Ferguson says.

While business is booming for Los Angeles-based advisor Chris Van Slyke, he too is still finding that he has to battle clients' desire to invest in what has already topped out. "In the past four years, California real estate has appreciated dramatically [often doubling in price as it has in many other places in the country]. So I have clients who come in and want to sell all of their stock portfolio and buy more real estate, which has made many of them wealthy," he says.

The way Van Slyke sees it, his job is to keep them from making such dramatic changes. "You still need the courage to buy what just went down and sell what just went up. They'll ask me if interest rates are going up and I tell them, 'I don't know. But I know that asset allocation works. And I know that a portfolio that is lopsided with real estate and small-cap value and foreign stocks, especially small-cap value, will hurt you.'"