Financial advisers are viewing the market gains of the past month with skepticism as they weigh whether it is time to dip a toe back into equities.
Between March 9 and last Wednesday, all three major stock indexes climbed significantly. The Nasdaq Composite Index led the way with a 22.9% gain, while the Standard and Poor's 500 stock index rose by 20.8%, followed by a rise of 18.3% by the Dow Jones Industrial Average.
Rather than jumping into stock purchases immediately, many advisers said that they were gingerly re-balancing portfolios and reassessing their strategies.
"Clearly, the latest upturn has risen to at least bear market rally status, as opposed to a short-term dead-cat bounce," said Jerry Ver-seput, an adviser with Veripax Financial Management LLC in Sacramento, Calif.
"If we wait to reinvest until some point where we feel better about the market, we will either get in near the top of the bear market rally and face another round of big losses or miss half of the bull market," he said. "Either case is not pleasant."
Jerry Wade, chief investment officer of Wade Financial Group Inc., said he concentrates on stocks that have also consistently paid dividends. His Minneapolis-based firm manages $140 million.
Mr. Wade uses a strategy that he calls a "lockbox," in which he has clients buy and hold stocks for as long as a decade, while collecting dividends. Pharmaceutical companies such as Bristol-Myers Squibb Co. and Merck & Co. Inc., as well as McDonald's Corp. and Wal-Mart Stores Inc., are among the companies that he has recommended.
MARCH PANIC
Although Mr. Wade's clients were able to stomach last fall's market tumble, they panicked when the S&P 500 fell as low as 672.88 on March 9.
"None of the clients wanted to bail in September," he said. "Then we had two or three who called in March when the market was in a downward roll; they wanted to go to cash. And the next day, the rally started."
Bearing in mind the declining price of oil and anticipating an energy rally, Mr. Wade pointed to energy stocks, including natural gas, oil and coal. He invests in the latter through Market Vectors Coal (KOL), an exchange traded fund offered by Van Eck Global in New York.
The recent rally helped Mr. Verseput's strategy, which is to invest across an array of sector ETFs and set a trailing stop limit order on each one. This way, his clients could ride the rally and then automatically sell when the rally begins to flag.
Mr. Verseput invests equally across all non-correlated sectors, but he said that although he thought at the beginning of the year that energy would be the strongest sector, financial stocks have defied expectations.
"Over the last three months, everything has been so news-driven. I don't know how you can predict which will do better, so I keep an even allocation across all sectors," said Mr. Verseput, whose firm manages $10 million. "The most non-correlated asset group still correlates by over 80%, which means you're not as diversified as you think you are."
For other advisers, portfolio re-balancing can be its own strategy. For instance, clients at Martin Wealth Management LLC of Fort Collins, Colo., are shifting back into equities in order to maintain their asset allocations to equities and fixed income.
"Nobody is able to predict the right time to make a move into equity, so use your investment policy statement. If the appropriate level of risk is 60% equity, we'll re-balance," said the firm's president, Steve Martin.
Meanwhile, he is waiting for the stock indexes to get a little closer to where they were prior to the massive decline last year.
"I don't use four-week moving averages," said Mr. Martin, whose firm manages $11 million. "The market is undervalued by historical standards, and it will come back at some point."
In the meantime, Mr. Martin is using laddered bonds for clients who are near retirement.
For other clients, minimal action might be best, such as holding off on re-balancing — a move that adviser David E. Hulstrom calls "strategic sloth." He declined to disclose the assets of his firm, Financial Architects LLC of Woodstock, Ga., but Mr. Hulstrom, who is a consultant to other advisers, has been in the financial planning industry for 20 years.
A portfolio with 60% allocation in stocks and 40% in fixed income might have become a 50/50 portfolio after stock values fell, but that proportion can be advantageous in the sense that it is more conservative and has a lighter weight in the event of a continued decline, he said.
"If you had re-balanced [in September], you would have come into October with your full weight in risky stuff," Mr. Hulstrom said. "We haven't re-balanced again since the end of December, so clients are more conservative than they would be in their average allocation."
Despite the run-up in stocks, Mr. Hulstrom remains skeptical of whether the rally will signal a recovery. He maintains that re-balancing — rather than changing allocations — is the way to go.
"That was a very quick rally, and I never claim to know what will happen next," Mr. Hulstrom said.
E-mail Darla Mercado at [email protected].
