By Warren S. Hersch
With stocks in bear market territory and economic recovery still far from certain, counseling clients to stay invested in equities may not, at first glance, seem a wise course.
But advisors are doing just that.
“It’s counterintuitive to a lot of folks, but we do feel that equity exposure is essential for clients near or already in retirement,” says Paul Bennett, a certified financial planner and managing partner of C5 Wealth Management LLC, Great Falls, Va.
“Yes, we may recommend dialing down the equity component as clients near retirement, but the level of equity exposure will ultimately be based on the client’s risk tolerance and financial sources.”
Many of the firm’s retired clients have more than 75% of their investable assets in equities, says Bennett. By contrast, some younger clients who are still in their 40s and 50s have a much reduced equity exposure because of their greater aversion to market risk. Among them are entrepreneurs who are depending on their businesses to provide for retirement.
Though heavily invested in equities, older clients are not always betting on market gains. In July 2007, says Bennett, his firm hedged by taking a 10% to 12% position in a “bear fund” that shorted stocks. Result: Clients’ portfolios enjoyed a 24% rise. The firm later pulled out of the fund on the expectation of market rebound.
In all, says Bennett, clients can choose from among 8 model portfolios, which variously invest in stocks, mutual funds, Treasuries and exchange-traded funds; the last provides exposure to precious metals and other commodities. To mitigate the impact of market gyrations, the company also frequently recommends fixed annuities and variable annuities with guaranteed living benefit riders.
Bill Lehnertz, a chartered life underwriter and CEO of TLC Financial, Inc., Minneapolis, Minn., also sees the high equity position–stocks and mutual funds accounts for as much 70% of many retirees’ portfolios–as necessary to recover lost asset values stemming from the market downturn. So, in recent months, he moved clients to “more volatile” investments to buy equities at bargain prices, he says.
To be sure, not all of Lehnertz’ clients are prepared to chance further erosion of their portfolios. For these more risk-averse investors, Lehnertz often recommends a fixed or variable annuity sporting a guaranteed minimum income or guaranteed minimum withdrawal benefit.
“These products let them sleep at night and still be invested in the market,” says Lehnertz. “Many fixed and variable annuities are especially attractive now, as their costs are coming down.”