What’s worrying investors? Risk, rates and health costs

As the major stock market indexes push new highs, financial advisors are fielding more phone calls from clients anxious about volatility and how their investment portfolios could be affected by rising interest rates.

“The dynamic of perpetually low interest rates and rising stock prices hasn’t changed for a long time,” said Ed Gjertsen, a certified financial planner, vice president at Mack Investment Securities and current president of the Financial Planning Association. “We’re trying to prepare clients for the one to four quarters when their bond portfolios decline and so do their stocks.” He added, “We tell them that if rates are going to rise, they’ll lose money.”

Victor J. Blue | Bloomberg | Getty Images Traders work on the floor of the New York Stock Exchange.

Victor J. Blue | Bloomberg | Getty Images
Traders work on the floor of the New York Stock Exchange.

It may still be a while before that happens. Several weak economic reports and an apparent first-quarter slowdown in the U.S. economy could cause the Federal Reserve to delay raising short-term interest rates. The bond market is now expecting the Fed to wait until at least September before hiking rates for the first time since 2006. The yield on the 10-year Treasury bond, up more than 50 basis points during February and early March, has fallen back below 2 percent, and rates across the credit spectrum have generally followed suit. “It’s the clients close to retirement that are most nervous,” Gjertsen said.

He feels their pain. With no real precedent for the current monetary situation, Gjertsen, too, has concerns about what will happen when the Fed finally moves to raise interest rates and normalize monetary policy. “We’ve never experienced a market with this amount of liquidity; no one knows how it ends,” Gjertsen said. “When rates start rising, hopefully it doesn’t unwind and we have another 2008.”

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Joel Isaacson, financial advisor and CEO of wealth management firm Joel Isaacson & Co., also hears client concerns about rising interest rates, but he doesn’t try to handicap where the market is headed. “Forecasting interest rates is a minefield,” he said. “I don’t see a lot of upside to the bond market, but when the Fed stopped quantitative easing, it didn’t play out too badly.”

Isaacson thinks that weak economic growth and low interest rates globally will likely keep long-term rates in the U.S. down and expects the yield curve to flatten when the Fed starts raising short-term rates. He nevertheless favors short-term and intermediate bonds with limited credit risk.

Isaacson said that his clients are expressing concern about global political stability and how it could affect the financial markets. “Things are very different from the cold war period,” he said. “People don’t get the sense that governments know how to deal with problems anymore.

“The Middle East is festering, and it’s spilling over to Europe,” Isaacson added. “Everyone is watching and worrying about what’s going on around the world.”

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The challenge for financial advisors is getting clients to stick to their financial plans and to rebalance their investment portfolios to target allocations. “Historically, globally balanced portfolios provide higher returns with lower volatility,” said Michael Ward, founder and president of Wealth Management Partners. “It’s a good time to ramp up the education process with clients.”

With the U.S. large-cap stock indexes crushing most other asset classes, some of Ward’s clients are asking why they aren’t invested more heavily in U.S. stocks. “I worry when clients start asking why we don’t have more SPY [S&P 500 Index ETF] exposure in the portfolio,” Ward said. “In 2000, everyone wanted the QQQ [Nasdaq 100 Index ETF tracker], and it took 15 years for it to reach those levels again.”

“Most of my clients are retired and they’re concerned about volatility. They’ve lived through it twice, and they don’t want to do it a third time.”-Michael Ward, president of Wealth Management Partners

The majority of Ward’s clients, however, are less concerned about missing out on gains than they are in avoiding a market meltdown. “Most of my clients are retired, and they’re concerned about volatility,” Ward said. “They’ve lived through it twice, and they don’t want to do it a third time.”

With the broad increase in the stock market, one downside of portfolio rebalancing is the taxable capital gains it generates for investors. And other than in the energy sector and possibly emerging markets, there aren’t a lot of places to find capital losses to offset those gains. That, of course, is good news, but it does mean people will have more significant tax bills. “A rebalancing is going to sell from the positions that have gone up the most, and it’s hard to find losses in a portfolio that’s been invested since 2009,” Ward said.

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Apart from the investment markets, the rising cost of health care continues to be one of the chief concerns of middle-class Americans, and many people are looking to their financial advisors for help.

“I think people are becoming much more aware of the high cost of health care, particularly in retirement,” Ward said. “We have a separate budget line item of $1,000 per month for additional retirement health-care costs for our clients, and that doesn’t even include long-term care or nursing care.”

Long-term care and the difficulty in financing it remains a huge problem for middle-class families. The cost of insurance has skyrocketed over the last five years as insurers have repriced policies and slashed benefits. For most people, the cost is prohibitive, and they choose to self-insure, hoping that they have enough assets to sustain themselves if they do require long-term care in the future.

Many baby boomers nearing retirement aren’t just worried about themselves, either. Gjertsen and other advisors at Mack Investment Securities have been helping clients find home health-care providers for their aging parents. “They may think they have enough for themselves, but all of a sudden we’re having more conversations about how they’re going to take care of elderly parents,” he said.

—By Andrew Osterland, special to CNBC.com

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