As questions about future returns swirl, advisors seek shelter for clients
It's been quite a run. Since the start of the current bull market, the S&P 500 has delivered an annualized total return of 17.58% (through October 2019). That compares with a 10.24% annualized total return for the index since 1926, according to S&P Dow Jones Indices. Still, that performance doesn't necessarily indicate stocks will tumble, some advisors say.
“I’m not particularly worried that the next decade will be bad [just] because the current one has been good,” says Ken Waltzer, managing partner at KCS Wealth Advisory in Los Angeles.
Waltzer notes that the period from 2000 to early 2009 was a poor one for stocks in the overall context of the S&P’s total returns during that time. Four of those nine years saw negative total returns for the index. Three others were positive but below the mean since 1926. Only two years saw significant gains, but they were overshadowed by the weaker years. The dot-com bust and the financial crisis generally negated those two good years.
Even though Mark DiGiovanni, president of Marathon Financial Strategies in Grayson, Georgia, concedes that domestic stocks “might be running a little hot at the moment,” he doesn’t want people to start believing that past is prologue.
“I’ve tried to make sure that the clients don’t start thinking that this [extended bull market] is the new normal,” he says. He credits the financial crisis with setting the stage for the current bull. “From that point, you almost had no place to go but up,” he says.
Roger Ma, founder of financial planning firm lifelaidout, based in New York, agrees that the immediate past does not foretell the future. “We’re not assuming 10%, 15% or 20% returns," Ma says. "No one really ever knows what the sequence of returns is going to be from one year to another.” As a result, Ma assumes long-term annual returns of 5% to 7% when creating plans for clients. That may seem low to clients based on recent returns from their stock portfolios. It may also mean adjustments in thinking about retirement.
Ma observes that although clients can’t control the markets, “there are a lot of other levers that they can control to help mitigate this risk.” The biggest, he says, is spending. “Decreasing your living expenses can have a significant impact on how much you need to save for retirement.”
But if U.S. stocks do slow their advance in the years ahead, are there any asset classes that could take up part of the slack?
Andy Kapyrin, co-director of research at Regent Atlantic in Morristown, New Jersey, is looking to foreign stocks.
“Valuations for foreign assets, both developed and emerging, are well below their historical norms,” he says, arguing that although day-to-day news can make investing in foreign stocks look daunting what with the trade war and Brexit, it’s difficult to realize that you are “buying a pool of businesses that have less exposure to the news flow than you might expect.”
Kapyrin notes that they typical U.S. investor has between 10% and 20% of assets invested abroad and opines that over the coming 10 to 20 years, 30% to 40% would be a better goal.
But Jim McDonald, chief investment strategist at Northern Trust, which sponsors FlexShares ETFs and Northern mutual funds, says that in the near future, foreign stocks may simply match U.S. equity performance.
“The returns of all asset classes are likely to be lower over the next five years,” he says. McDonald expects all developed markets to return about 5.7% annually over that period.
Real assets can boost yield and reduce exposure to traditional stocks, observes McDonald, whose firm favors stocks of companies in real estate, infrastructure and natural resources.
“Owning the equities of the producers of the commodities is a much better investment than owning futures on the commodities themselves,” he says.
Waltzer seeks an edge for his clients through preferred issues, emerging market debt and convertibles. Mostly he buys individual issues, citing the high cost of mutual funds and the tendency to lump bad holdings with good in many ETFs.
But for many planners, including DiGiovanni, the key is asset allocation. He also earmarks cash for client needs ups to 18 months out and bonds for another five years out, minimizing the need to tap equity holdings.
Ma admits to a “boring” asset allocation. “My focus is on keeping costs low and maintain a portfolio that is as tax efficient as possible,” he says.