Although a consensus is building that the U.S. economy is slowly beginning to turn in a positive direction, CPAs and the financial strategists they rely upon are not urging clients to make wholesale shifts in their investment portfolios. Indeed, some are turning somewhat more cautious in the short term.

Regardless of any expectations they may have about economic and financial market patterns in the near future, however, CPAs are keeping steady pressure on clients to adhere to their broad guidance on maintaining asset allocations that will keep them in good shape over the long haul, through the inevitable cyclical market patterns ahead.

"A rebound will occur," said Ted Saneholtz, CPA, CFP and president of Summit Financial Strategies in Columbus, Ohio. "Whether it's in 2010 or 2011 is a moot point to me. We feel that an asset allocation strategy in itself should be addressing the market cycles."

A more nuanced, and cautiously optimistic, analysis was offered by Jaco Jordaan, CFA, senior portfolio manager for H.D. Vest Advisory Services: "Many important economic indicators ... do appear to be pointing towards a recovery," he said. "Unfortunately, the indicators are not unanimous."


Tempering his optimism further, Jordaan said, "We still face significant headwinds to the main driver of GDP - consumption."

"It's difficult to see how consumption will pick up in the face of what so far has been a jobless recovery with unemployment remaining near 10 percent, a housing market that continues to produce foreclosures and has left many borrowers upside down, and a resulting increase in savings as consumers are either attempting to de-leverage, or are simply building up emergency reserves because of uncertainty."

Jordaan said he'll be more confident the economy is on solid ground when job creation (and the resulting uptick in consumer spending) returns, unaided by temporary stimuli like "Cash for Clunkers" tax incentives.

Josh Willard, senior vice president of Coghlan Financial in San Diego, said that he'll be sanguine that the economic recovery will be sustainable when it's apparent that the federal government has a plausible exit strategy from the investments and loans it made to bail out the banking industry and that it will be able to soak up the excess liquidity it pumped into the economy in 2008-2009 without inadvertently killing the recovery.

And what are the portfolio management implications of all this for financial advisors? It seems to boil down to their overall approach to investing.

"My philosophy is that everything goes in cycles," said Marc Wagner, a CPA in Yardley, Pa., who handles his investments through broker-dealer H.D. Vest. "We try not to gamble on what we think may or may not happen in the short run. We keep clients well-diversified and help them deal with whatever comes down the road."


Still, Wagner is trying to prepare clients for the prospect of rising interest rates by trimming bond durations. And in keeping with his core belief in periodic rebalancing of portfolios to maintain an established asset allocation, he explained that he'd "sell something else to buy more bonds" if they go down in value.

Similarly, Glenda Moelenpah, CPA, CFP, of Financial Bridges in San Diego, has already been encouraging her clients to trim back their equity positions that have been exceeding previously established asset allocation boundaries due to the recovery of stock prices that began a year ago - particularly because she's uncertain about what drove the market to retrace its steps in the absence of any fundamental change in underlying economic conditions. "I'm telling them to take those gains and invest in something else."

Coghlan Financial's Willard also has been sounding a more cautious note lately. "We've made our allocation models a bit more defensive lately," he revealed.

For example, he has been tilting more towards the large-cap end of the equity scale, particularly dividend-paying stocks. On the fixed-income side, Willard said that he's emphasizing credit quality and shorter duration issues. "I believe we've turned the corner, but I don't believe we're going to see a dramatic recovery in a short period of time," he said. "I think it will be drawn out over a period of three to five years."


Dennis Parker, CPA/PFS, said that he's "hanging tough" with the basic positions his clients have taken, although he is encouraging some to increase their bond holdings. "We've had a pretty good recovery, and I see no need to alter things dramatically."

"The amount of equities in a client's portfolio is more a function of their risk tolerance and their time frame and overall goals, than anything we think is going to happen over the next six months," Wagner said. "The recent decline has caused a lot of people to re-assess their risk tolerance, and possibly made people realize they may not be as risk-tolerant as they thought they were."

Excessively low risk tolerance, of course, can make it very difficult for clients to achieve their financial goals, particularly in a low-interest-rate environment. That's why Summit's Saneholtz strives to keep his clients focused on an asset allocation model that's not driven by market cycles. Automatic rebalancing of a portfolio to maintain its equity allocation during a declining market cycle can help keep clients from bailing out at the low point, he advised. Still, he admitted it doesn't always go smoothly.

"It can be an exercise in futility," he said. "You're wrestling with human nature."

For that reason, Wagner has insisted that when clients get skittish and want to pull back significantly or entirely on equities, they agree to a process by which they will re-invest. "I got them to agree to dollar-cost-averaging back in." He recalled of a pair of clients who dumped all their stocks during the 2008-2009 crash. Getting their advance consent on re-entering spared them the possible trap of re-buying at the top of the next cycle.


In the aftermath of that crash, investment companies have been offering a dizzying array of new kinds of mutual funds and exchange-traded funds intended to offer investors re-assurance that they won't get their fingers burned again - or at least not as badly.

Some of these funds are just variations on old sector mutual funds, narrowly targeting particular industries, geographic regions or commodity categories. Others embody investment strategies typically employed by hedge funds, featuring shorting, use of options and leverage.

While some of these funds may be casually assumed to be counter-cyclical to a standard stock and bond long-only portfolio, that may not be the case. An analysis by Morningstar comparing the performance patterns of a plain vanilla 60/40 stock-to-bond portfolio with a precious metals and mining ETF, a REIT index, an emerging markets index and an emerging market bond fund over a 74-month period ending Dec. 31, 2009, shows them all moving closely in tandem. (None showed a correlation coefficient below 0.71.)

In contrast, so-called "bear market" funds, currency and long/short commodity funds showed a much lower correlation to the 60/40 portfolio, suggesting they can indeed provide greater diversification - if that's desired.

CPAs don't appear eager to snap up such funds, however. "I'm not a really big fan, to tell you the truth," Wagner said, adding, "The nature of the investment products world is they tend to introduce product when an area is 'hot.' We saw that when everybody was coming out with technology funds in the late 1990s."

H.D. Vest's Jordaan remains somewhat more open-minded, but still uncommitted on the subject. "We have been following many of these so-called 'new' investments because it is important to find ways to reduce downside risk for client portfolios," he said.

Perhaps a larger issue for CPAs is simply managing client expectations - both about their portfolios, and what CPAs themselves can do to assure a good outcome. "I'm very clear with my clients that I don't know what's happening in the markets in the short term," said Wagner. "My expertise is helping them with retirement and legacy planning."

Parker adds to that the role of "relaxer" - "I have some gray hair. I've seen several market cycles. That helps me to do the hand-holding to calm people's fears that there might be no tomorrow."

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