Crystal Ball

Advisors urge clients to stay focused on stocks for 2015


Despite a few last-minute stock market scares near the end of 2014, the once again posted a double-digit return—for the fifth year out of the last six.

U.S. stocks have outperformed virtually every asset class in the investment spectrum since they bottomed out in May 2009. The S&P 500 index has almost tripled since then without ever dropping more than 20 percent along the way. It hasn't even had a 10 percent correction since 2011, when the debt ceiling crisis spooked the markets.

Kevin Winter | Getty Images

This remarkable run aside, certified financial planner Brent Brodeski thinks the outlook for stocks remains positive given the backdrop of an improving economy, low inflation and low interest rates.

"Things look good," said Brodeski, CEO of registered investment advisor Savant Capital Management. "The economy is not too hot and not too cold, and I think valuations in the U.S. are reasonable given the environment of very low interest rates."

Advisors overseas

Brodeski, however, isn't suggesting investors double down on U.S. stocks.

Like most financial advisors, he recommends that people stick to their financial plans and rebalance their portfolios to target allocations.

"I'm an admitted optimist, and I'm most optimistic where prices are most reasonable, and that's overseas," Brodeski said.

Mark Cortazzo, a CFP and senior partner at Macro Consulting Group, is more alarmed with the euphoria over U.S. stocks.

"People have stopped respecting risk," he said. "The memory of 2008 has disappeared from their minds."

Cortazzo is also pushing clients to rebalance their stock holdings toward cheaper foreign stocks. "At market tops and bottoms, people tend to do dumb things," he said. "They don't rebalance, because they don't want to buy losers."

With Europe looking fragile and emerging markets—most notably China—showing slower growth, it can be a tough sell. While admitting he could be wrong in the short term, Cortazzo is thinking about the next 10 years and advising clients to buy low and sell high with disciplined rebalancing.

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"The last time emerging markets were this out of favor versus the U.S. was 1999," he said. "If you bought emerging markets then, they went up four times between 2002 and 2007, while the U.S. market doubled."

David Grecsek, director of investment strategy and research for Aspiriant, thinks the U.S. market is at least fully valued and is telling clients to be "realistic" about returns going forward. He advises reducing exposure to small-cap stocks and investing in more defensive equities with high-quality names.

Grecsek also recommends rebalancing to lower-priced foreign markets and to fixed-income investments. "How many years in a row can we get double-digit gains in U.S. stocks?" he asked. "It can't continue forever. It's a good time to take risk off the table."

Bond bull market dying hard

Perhaps more surprising than the strength of the stock market is the performance of long-term Treasury bonds. Widely expected to fall as the Federal Reserve exited its QE3 bond-buying program, the 10-year Treasury bond is up about 10 percent so far this year.

The 30-year Treasury is up a remarkable 26.5 percent through Dec. 8. The yield on the 10-year Treasury has fallen from over 3 percent to 2.20 percent currently, posing major challenges for retirees depending on interest income from bond portfolios.

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"It's a persistent conversation with clients," Cortazzo said. "Interest rates are going to go up, and yet they've been going down.

"We hedge against rates rising, but our fixed-income positions depend on client profiles," he added. Cortazzo said he doesn't expect rates to rise dramatically and favors government and high-quality corporate bonds.

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Most advisors think the weakness in global economies, the lack of inflation and lower interest rates elsewhere suggest that a sharp rise in U.S. long-term rates is unlikely. Grecsek at Aspiriant expects the yield curve to flatten if the Fed starts raising short-term rates next year, with global capital flows putting a ceiling on long-term rates in the U.S.

He doesn't think investors are getting compensated enough for taking on credit risk in corporate bonds but does see opportunities in municipal bonds. The improving economy is also helping the fiscal profiles of municipal issuers.

While a fair amount of the market now lacks bond insurance, the 5 percent to 5.5 percent return on the Barclay's municipal bond index translates to about a 9 percent return after tax. "It's a good time for credit risk in the sector," Grecsek said.

Assessing alternatives

It's probably not surprising that interest in alternative investments has started to wane. Assets poured into liquid mutual and exchange-traded funds employing hedge fund-like strategies after the financial crisis, but they have massively underperformed stocks.

While stocks may not be the relevant benchmark, the high fees and poor results are hard to ignore. Studies and Morningstar fund flow information suggest that financial advisors are turning off of liquid alt funds.

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"The average investment advisor is not that different from the average retail investor," suggested Rick Kahler, a CFP and CEO of Kahler Financial. "They moved away from equities in 2008-2009 and are now becoming disillusioned and returning to equities probably just in time to get fleeced again."

Kahler is maintaining his allocations to alternatives. For a client with 60/40 stock/bond portfolio, he invests half the equity allocation in alternative investments, such as real estate, commodities, limited partnerships and a few liquid funds. He plans to stick to that formula.

My guess is that stocks will be up, bonds will be down, commodities up and real estate down. And I'm not going to do a thing about it.
Rick Kahler
CEO of Kahler Financial

Where does Kahler see markets going next year?

"My guess is that stocks will be up, bonds will be down, commodities up and real estate down," he said. "And I'm not going to do a thing about it."

At least nothing out of the ordinary. Kahler's investment management plans for his roughly 100 clients remain the same: Maintain a portfolio diversified globally and by asset class, and rebalance it to target allocations with a 20 percent sensitivity.

When assets such as U.S. stocks (13 percent of a 60/40 portfolio) rise relative to international stocks, commodities or real estate, he sells them and invests the money in less highly valued places. Kahler puts more of his effort into managing the timing of asset sales for clients and reducing the taxes and fees they have to pay than handicapping markets.

"I used to be a tactical allocator, but my brilliance as an advisor now is knowing I'm not that smart," he said.