These Clients May Be Overexposed to Stocks

With the S&P 500 up 20.4% year-to-date and the Nasdaq-100 Index (NDX) higher by a scorching hot 44.4%, it’s easy for clients to be bullish on stocks. With the bear market of 2022 seemingly now a distant memory, some clients may be demanding more equity exposure or seeking it on their own.

Obviously, significant equity allocations are great when stocks are going up, but as advisors know, stocks don’t move up in straight-line fashion and bull markets aren’t permanent scenarios. Clients should know those things, too, and if they don’t, it’s on advisors to illuminate them to those facts because any number of factors can throw curveballs at bull markets.

All of the above can serve as reminders that there is something to traditional asset allocation strategies, particularly when it comes to baby boomers. That much ballyhooed demographic is now between 59 and 77 years old. Translation: Most boomers are already retired or getting close to that status.

Data indicates many boomers are also heavily allocated to stocks – perhaps too much so. That presents advisors with an opportunity, albeit a delicate one, to help older clients potentially lock in profits on winning equity positions while better positioning portfolios for the inevitable stock market retrenchments and bear markets.

Boomers and Equity Allocations

A recent survey by Fidelity’s Fidelity Workplace Investing arm indicates about 37% of boomers have more equity exposure than the asset manager would typically recommend.

For those that need more convincing, I submit an anecdote. My dad is 75 years old. A couple of weeks ago, he unleashed a text “barrage” on me, advocating that I buy several stocks. Fortunately, most of his picks weren’t alarmingly risky. McDonald’s (NYSE: MCD) and Pepsico (NASDAQ: PEP) are two of his favorites. Point is my father owns individual stocks and equity-based funds. To my knowledge, he’s never owned bonds and yes, he’s retired.

Of course, the above is just a personal anecdote, but between that and the aforementioned Fidelity data, it’s probably accurate to say that advisors have a few (or more ) boomer clients that are over-allocated to stocks. There is a silver lining in that Fidelity notes close to half of the investors surveyed are on track with appropriate portfolio allocations.

Still, there’s work to be done by advisors when accounting for the point that most clients fall into one of three categories when it comes to retirement readiness. There are those with more than enough resources to enjoy comfortable retirements, another group that is not far off from the “solid” category and those that need a lot of help. Good news: All three groups need equity exposure.

Tips for Equity-Addicted Boomer Clients

Regardless of a client’s age, talking them back from an asset class that’s rewarded them can be a difficult task. A starting point for advisors is identifying the downside risks clients face when they’re over-allocated to stocks later in life and presenting those facts to the client.

That point can be reinforced in positive fashion by acknowledging not all equity exposure will be eliminated. Rather, the point of the exercise is identifying the “sweet spot” of stock allocations for boomer clients.

It’s likely some clients will be apprehensive about paring stock exposure, so it could pay for advisors to focus on basics, such as dialing back small-cap allocations, locking in profits on portions of tech positions and perhaps redirecting some of that capital to safer, dividend-generating sectors such as consumer staples and healthcare.

Related: Preparing Clients for 2024 Elections