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By Christine Benz | 10-10-2011 12:17 PM

Talking Investors Down in Volatile Markets

Examining true market exposure and putting recent performance in a longer-term perspective helps to calm worried investors, says financial planner Sue Stevens, CEO of Stevens Wealth Management

Christine Benz: Hi, I'm Christine Benz for Morningstar.com.

One day the market is down, one day it's up. It's enough to make even seasoned investors question their financial plans.

With me on the phone to discuss some concrete tips for navigating volatile markets is Sue Stevens. She is the CEO of Stevens Wealth Management.

Sue, thanks so much for joining us.

Sue Stevens: Thanks. I'm delighted to be here.

Benz: Sue, imagine that I am a client who calls you up. The market has been really volatile. Say, that I'm very nervous about my investments. I think that I want to move part of my equity allocation to cash or something safer. What do you say to me at that time to kind of talk me down?

Stevens: Well, we get this kind of call fairly often as you might imagine when the markets are as extreme as they are, and what I like to do is start by really focusing on the facts. So, if you were my client and I was talking to you, I think one of the first things that I'd want to cover would be how much do we even have in this stock market? Most of the portfolios we manage are balanced portfolios, and I think sometimes the clients get caught up in hearing all the extreme opinions on the news, and they forget, "Oh, I only have 25% in the stock market" or something like that. So, the first thing to do is really understand, how much do you have at risk that's in the stock market?

And I think the second thing that I like to do is to put it in perspective by looking at, "well, where are returns for the year?" So, even though we may see stocks dropping 20% or so in August, recently, if we look at the performance even of the year-to-date, most of the time when we're looking at that number, they may be down 3%, but that's because they have a balanced portfolio for the most part. That calms people down right away, I think, is to realize, "Oh, well, 3%, I can live with that. I understood when we had the first conversations about how much do I want to have in stocks versus bonds versus cash, that part of the reason to have a balanced portfolio was to give you a little more comfort level when we get into these extreme stock markets."

Benz: So, Sue, if I'm a retired client, would you counsel me any differently? Are there any other topics that you would bring up as part of that discussion if I were a very nervous retiree?

Stevens: Sure. I think, anybody approaching retirement, within a couple of years of retirement or somebody in retirement, really has a much tougher time of it, because they have to make that nest egg last a long time, and it's really the most vulnerable time for somebody in their lifecycle to go through a protracted bear market.

So, I think, again, the things to focus on would be, what's the asset allocation? A lot of times, when I have a conversation with a client that's just retired or thinking about retiring shortly, maybe what we do is we look at a mix where we might have been 35% in stocks, and we say, "You know what--for the next period, why don't we make that 25%?" And it's not that you have to stick with the same mix forever. You can dial it up and back depending on what we are seeing.

In general, though, I think you want to stick with some sort of strategic allocation and understand the pros and cons of what you're getting with those different mixes. And it's kind of interesting. Lately, we've been looking at portfolio numbers of different types of mixes, and one of the things that we've noticed is, in this most recent period, whether you're looking at three years or five years, or even a little further back than that, the portfolios with more bonds in it are actually beating the portfolios with more stocks in it.

So, I think, that's an important conversation to have with retirees, too. We don't know if that will continue, or if it will continue for how long, but I do think it's important to understand what to expect. And maybe that's one more thing to point out to people is, especially in times like this, I think you need to have realistic expectations, and in my opinion, and I think a lot of other experts that are out there, bonds are probably only going to return somewhere in the, say, 2% to 4% range for the near-term, and I'd put stocks at may be 6% or so.

So, a balanced portfolio you're looking at maybe somewhere in the 4% to 5% range…

Benz: Sue, are those nominal return numbers that you're talking about or…

Stevens: Yes, that would be nominal. I mean, inflation right at the moment is as low as we've seen it in the long time. That could change easily going forward, but I think, most of my clients are concerned about just not losing money through these periods and making some sort of a modest return versus trying to capture large gains.

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