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Week In Review

Advisers Favor Tactical Allocation Over Traditional Equity Exposure

After last year's disastrous decline in all investment sectors, one of the worst years for investing since the 1930s, financial advisers are seriously rethinking traditional diversification and modern portfolio theory.

"We've always been proponents of modern portfolio theory, the idea that everything derives from asset allocation," Steven Enright of Enright Financial Advisors told The Wall Street Journal. "But 2008 is the first time this really didn't work to hold up portfolios. So while we haven't been torn away from modern portfolio theory, 2008 has made us think we should modify the way we do things a bit."

Likewise, Brian Kazanchy, chairman of the investment committee at Regent Atlantic Capital, said, "Making tactical changes to the asset allocation-overweighting here or underweighting there-can add a lot of value, and it's not like jumping in and out of stocks to capture short-term gains. It's based on research on valuations and long-term trends."

Some financial planners have decreased their core holdings so that they have more flexibility to shift the high-growth portion of their portfolio. Many are turning to flexible, broadly based mutual funds, including index funds. Exchange-traded funds are figuring more prominently in portfolios, too, since they can be traded intraday and are so low cost. Sectors that planners currently like include emerging market, foreign and small-cap stocks, bonds and commodities, including precious metals.

Other professionals predict that stocks are unlikely to return to their historical highs, due to a slow recovery, slim corporate profits and a more volatile stock market. The traditional portfolio allocation of 60% stocks and 40% bonds "is almost like Betamax videotapes. It's now passe," said Andrew Silverberg, co-manager of the Alger Balanced Fund, who said he is a proponent of "more dynamic" asset allocation. The 60/40 rule "gained popularity while we were still in a bull market."

Also in this camp of taking a flexible approach to investing is Steven Romick, manager of the FPA Crescent Fund. "Any kind of strict percentage allocation doesn't make sense. It's just ridiculous," he said. He has 27% of his portfolio in cash, 38% in stocks, 28% in corporate bonds and 7% in shorts.

6% of 401(k) Investors Cease All Contributions

Many investors are still too afraid to get back into the stock market, and their hesitancy is putting a drag on the market's resurgence, the Chicago Tribune reports.

About 6% of 401(k) investors have stopped contributing to their plan altogether, not realizing that they have the choice of putting the money in stable-value funds rather than the market. One investor incorrectly commented, "I am a middle-aged person, concerned about what approach is useful when it comes to socking away money for retirement. My previous strategy of putting as much money into my IRA, 401(k), as possible no longer seems prudent."

Pamela Hess, a Hewitt Associates researcher, said figures her company has compiled show a steep retrenchment from equities. "People pulled back from stocks dramatically [during the downturn], and we have not seen that reverse," she said.

Nonetheless, not all reports of investor confidence are gloomy. Fidelity recently reported that after investors decreased overall 401(k) contributions between the third quarter of 2008 and the first quarter of this year, in the second quarter, they increased contributions.

Anecdotally, the decline in those contributions might be due to job losses, as well as those lucky enough to still have a job concentrating on building up emergency savings, rather than preparing for retirement. It could also be due to the fact some employers are no longer matching employees' contributions, and some have stopped automatic enrollment.

Regardless of the reason for investors' aversion to the stock market, if more of them don't return to equities, the market won't deliver strong gains, if any, for the foreseeable future. With about $12.4 trillion worth of stocks outstanding on the market, individuals could have a big impact on the stock markets since they control $13.4 trillion in retirement assets. As the Tribune puts it, "individuals' decisions to choose stocks, bonds or other assets for nest eggs are important for the direction of the market."

So far this year, investors have poured $208.4 billion into bond funds, far more than the record $140.6 billion they invested in 2002 following the dot-com crash.

PIMCO Launches 'Real Income' Funds That Ladder TIPS

PIMCO has joined the retirement income race with its Real Income Funds, a suite of mutual funds that ladder investments in TIPS to serve as an anchor for retirees' portfolios by offering them steady monthly income, inflation hedging and liquidity.

Initially, the funds will be offered in maturities of 2019 and 2029, which means that up until those dates, when the funds will be depleted, they will draw down principal and interest to provide a steady stream of income.