Income Planning

Has the Bull Market Added Risk to Client Portfolios?

Beware of complacency: Rising stocks could add risk

New research from Fidelity Viewpoints. Reprinted with permission. Visit here.

For the most part, U.S. investors have had a good run. Since the March 2009 lows, the S&P 500® Index is up more than 225%.

And in recent months, the market has been pretty peaceful: The VIX Index, which measures volatility using option contracts, has traded at about one-third the levels seen during the crisis and well below its long-term average.
But in recent days, a sell off in tech stocks has contributed to a quick spike in volatility.

There is no way to know if that will prove to be a short-lived event in a long bull market, or turn into something more important. But it does serve as a reminder: Some investors may have become complacent.

Key takeaways

Stocks have rallied, and volatility has generally been low

Investors have increased the share of stocks in their portfolio

Volatility will eventually return

Consider reallocating in line with your long-term plan

Discipline… and a long range plan

“You never know what can cause a market downturn, so it’s important to remain disciplined and stick to your long-term plan—even when times are good,” says Ann Dowd, CFP® and vice president at Fidelity. “You don’t want to abandon stocks in a downturn or load up on them during a bull market. Being disciplined means diversification, periodic rebalancing, and adjusting your plan to stay up to date with changes in your financial situation and goals.”

Investors have increased their exposure to stocks
A recent analysis of Fidelity Personal Investing client accounts, primarily brokerage and IRA accounts, shows that the rising markets and investor behavior have combined to drive up stock holdings as a proportion of portfolios.

Back in 2009, Fidelity investors overall had 52% of assets in stocks; by the end of 2016, Fidelity investors had 67% of assets in stocks—back to levels last seen just before the financial crisis.1

To illustrate how a mix of stocks, bonds, and cash can grow more conservative as an investing goal approaches, Fidelity has created a “glide path.” (The black line on the chart below shows how the equity portion of the asset mix shrinks over time according to the glide path.) While the glide path isn’t a perfect asset mix for everyone, it can be a simple way to illustrate how an investment mix might change as a person approaches retirement.

Relative to the glide path, some young investors may actually be underinvested in stocks, while the opposite may be true for older people. For instance, 10 years after retirement, Fidelity’s glide path would hold about 40% of assets in stocks, but in aggregate Fidelity’s population of 75-year-old investors held more than 65% of assets in stocks at the end of 2016.1

Investors have been heavily allocated to stocks

Age-based glide path: equity allocation

For illustration only. Colored areas represent the asset allocation levels of Fidelity Personal Investing accounts as of December 31, 2016. The black line represents the level of equities held in the glide path for an age-based asset allocation strategy. Individual investors should determine the appropriate asset allocation based on their age, financial circumstances, tolerance for portfolio volatility, and savings goals. See footnote 1 for additional details.

What does that really mean? Well, let’s look at what happened in 2008 when the S&P 500® Index lost 38%. During that year, if you had a $100,000 portfolio with 40% in stocks, 45% in bonds, and 15% in cash, you would have lost about $8,000. On the other hand, if you had 70% in stocks, 25% in bonds, and 5% in cash, you would have experienced a loss that was almost three times as large, or roughly $22,500.2

Avoid the risk of chasing performance

It can be tempting to let your winners run—allowing the best-performing parts of your portfolio to grow. But it can also add more risk than you want. And that can be problematic—you don’t want to wait for a market downturn to realize you have more risk than you can live with. Panic selling while prices drop can be costly and put your long-term plan in jeopardy.

it’s important to remain disciplined and stick to your long-term plan—even when times are good

Here is what you should do instead:

  • Reevaluate your investing strategy at least annually or in the wake of any major life events, to make sure your investment mix is still in line with your goals, situation, and attitudes
  • Rebalance your asset mix to stay in line with your long-term plan
  • Review your portfolio to make sure your individual investments are still appropriate
  • Actively seek out opportunities to reduce investment expenses and take advantage of tax-saving opportunities




1. Asset allocation data based on a Fidelity analysis of customer data. The analysis looked at year-end data for retail customers and used mutual fund, individual security, and exchange-traded fund (ETF) assets. Managed account customers were not included. Data as of 12/31/2016.
2. Returns based on a hypothetical portfolio constructed of the S&P 500® Index for U.S. stocks, the Ibbotson SBBI U.S. Intermediate Government Bond Index for bonds, and the The Ibbotson Associates SBBI 30-Day T-Bill Total Return Index.
3. Fidelity Portfolio Advisory Service® is a service of Strategic Advisers, Inc., a registered investment adviser and a Fidelity Investments company. Fidelity Private Portfolio Service® may be offered through the following Fidelity Investments companies: Strategic Advisers, Inc., Fidelity Personal Trust Company, FSB (“FPT”), a federal savings bank, or Fidelity Management Trust Company (“FMTC”). Non–deposit investment products and trust services offered through FPT and FMTC and their affiliates are not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency, are not obligations of any bank, and are subject to risk, including possible loss of principal. These services provide discretionary money management for a fee.
This information is intended to be educational and is not tailored to the investment needs of any specific investor.