The bull market for stocks that began in March 2009 off of the lows of the financial crisis is still going and could possibly continue into 2015 and beyond if you believe the financial pundits. By various reports, however, a lot of individual investors have missed this torrid rally all or in part.

Fear Still Lingers

Doubtlessly, most financial advisors can point to fearful clients who still think about the market rout that occurred in 2008-09. The S&P 500 Index lost 37% in 2008 and many other benchmarks and asset classes did far worse. The pain was especially great for those nearing retirement. Surprisingly many millennial investors also remain fearful of the stock market as a result of watching the pain endured by their parents during 2008-09. (For more, see: Financial Advisors Need to Seek Out This Group NOW.)

In retrospect, however, those who sold out near the bottom and failed to get back into the market at least until the current bull market was in full swing are those who were hurt the most. I suspect that many of these investors were not working with a financial adviser and had nobody to “talk them off of the ledge,” so to speak. (For more, see: 5 Crucial Tips for Retirement Income Planning.)

Balancing Risk and Return

Determining the extent to which investors have really missed the rally has to be taken within the proper context. I don’t think any rational financial adviser would suggest that most of their clients be 100% invested in equities. (For more, see: Defensive ETFs for Tough Markets.)

However even clients at or near retirement generally need to have a portion of their portfolio allocated to stocks. To the extent that investors are under-allocated to stocks for their situation then this is true.

Retirement Risk

I often tell those in or nearing retirement that their greatest fear should be outliving their money. This is far more dangerous in my opinion that any risk posed by investment losses. Inflation is not dead. Even a small dose of inflation can have a devastating impact on a retiree’s standard of living. (For more, see: Closing in on Retirement? Read These Tips.)

An inflation rate of 3% will cut your purchasing power in half over a 24-year period. A 24-year period of retirement is not uncommon today with life expectancies increasing over time.

Many investors in their 50s or older are fearful of suffering major investment losses from which they may lack sufficient time to recover. While this is understandable, their investment strategy must include some level of equities and other investments that will hopefully allow them to keep ahead of inflation and to avoid running out of money.

Convincing Nervous Clients

It's important for financial advisers to explain the risks, potential for losses and very real possibility of running out of money to clients in a way that is understandable to them. This explanation will be a bit different for each client. (For related reading, see: Stock Market Risk: Wagging the Tails.)

Additionally you should help clients to take a look at their entire retirement income picture. Will they be receiving Social Security and if so how much per month? Do they have a pension? Some would argue that these ongoing payments can be looked at fixed income of a sort in figuring a client’s asset allocation.

It also makes sense for clients in retirement to have a certain amount of money on the sidelines to meet their spending needs for a period of time, say a couple of years. While this is a drag on returns in the long run it will allow many retirees to remain invested in the stock market if they know they likely won’t need to sell stock holdings at market lows to fund their living expenses. (For more, see: How Advisors Can Help Clients Stomach Volatility.)

Use Proper Benchmarks

To throw out the gains in the S&P 500 and say that investors who didn’t do this well have blown it is silly and frankly misleading. One only has to go back to the first decade of this century to see that diversification pays off. The S&P 500 and many large-cap stock funds did rather poorly while mid-caps, small-caps, international, and emerging market equities did relatively well. Moreover, diversified portfolios really didn’t suffer from the “Lost Decade” that the financial press popularized. (For more, see: The Importance of Diversification.)

A properly diversified portfolio would likely lag the S&P 500 today so the real benchmark would be a blended benchmark encompassing the underlying indexes in their relative weighting to the target allocation of the client’s portfolio. (For more, see: The Generation Y Investment Portfolio.)

The Bottom Line

There has been much said and written about in the financial press about the average investor having missed out on much of the post-financial crises bull market. I suspect this is a function of lingering fears from the 2008-09 market decline as well as a distrust of the markets and Wall Street in general. Retirees have more to fear from the potential impact of inflation on their retirement spending power than they do from the inevitable stock market declines. Most investors should have an allocation to stocks proportional to their age, risk tolerance, and their need for growth. It is incumbent upon financial advisers to steer their clients in this direction for their own financial health. (For more, see: 10 Tips for a Financially Safe Retirement.)

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