As the financial meltdown drained investors' assets a year ago, many took refuge in the booming bond market in order to bolster their retirement portfolios. But with observers' outlook for fixed income this year ranging from guarded to dismal, retirees and pre-retirees are likely to find themselves wading back into equities.

Common sense would dictate seeking out the beaten-down asset, which some might still think is domestic equities. Yet, even though stocks are generally expected to outperform bonds this year, another economic dip could disrupt expectations for modest gains in 2010. As a result, many advisors appear to be avoiding plain vanilla-and instead are seeking out international equities and other nontraditional assets that don't correlate to the S&P.

Even as advisors seek out growth opportunities for their clients, however, risk management obviously remains a priority. With one eye on long-term growth and the other on protecting a client's retirement assets, big losses are much more disastrous than sizable gains are beneficial.

With more questions than answers about where the economy and markets are headed in 2010, advisors know they are going to have to be nimble this year. "We do think there are opportunities for returns in 2010, but [earning them] will require very good securities selection and pretty active management instead of just saying that we're back to the days of 60/40 and I can sleep well at night," says Tim Knepp, chief investment officer for Genworth Financial Asset Management.

STILL STOCKING UP?

Of course, with the S&P 500's dramatic rally last year, investors didn't have to look very far for growth in 2009. J. Graydon Coghlan, president and chief executive officer of Coghlan Financial Group in San Diego, says his clients' gains averaged around 24% or 25% for 2009. "That isn't out of the ordinary," he says. "It wasn't as if we were completely separated from where everyone should be. The S&P was up in that range, so it's not as if we were creating magic."

Coghlan expects technology stocks to be a leading sector this year. He also expects to see the equity market continue to perform, driven by improved earnings. Thus far, many large companies have been underestimating their expected earnings so that they can beat them. The asset allocation Coghlan is using right now is about 15% in cash, close to 12% international equities, 35% in bonds and the balance (38%) in domestic stocks.

Genworth, meanwhile, has had an emphasis on yield and income orientation as opposed to just relying on capital gains, Knepp says. His investment team doesn't want to be completely dependent on earnings growth or expansion of multiples, which makes it guarded on equities. Within equities, however, yield is a good emphasis for retirees. Companies that have strong cash flows, pricing power and good balance sheets-such as healthcare, consumer staples and some tech companies-can support a dividend.

But Knepp is also concerned about some vulnerability on the downside with the S&P because so much of the rally has been supported by liquidity in one form or another from the federal government. One factor that might help the S&P's earnings going forward, Knepp adds, is that over time the components of the index are getting more of their sales and profits from outside the U.S.

Nevertheless, with the Treasury and Fed expected to back off their support, advisors and their clients are going to find out how much of this market rally was stimulus-driven. Jeffrey Phillips, chief investment officer of Rehmann Financial, a financial planning firm in Saginaw, Mich., believes the valuations have priced in the expected impact of the economic stimulus, but without a sustainable job recovery he is concerned that the domestic market will move sideways or even negatively.

"There is so much government involvement right now, which makes this business a lot more difficult than it was three or four years ago," he says.

Rick Pitcairn, chief investment officer for Pitcairn, a multifamily office in Jenkintown, Pa., acknowledges that much of the recovery is stimulus-led, "so the question marks aren't completely removed. We aren't in this state of nirvana." He still believes the data clearly shows we are in an early-stage recovery. "How it winds itself out will really revolve around Fed policy and whether or not and to what degree inflation takes hold," he says.

DOWNSIDE PROTECTION

Advisors who spoke to Financial Planning for this article are focusing on long-term growth for their clients' retirement portfolios, as they should be. What they're not doing is trying to score big hits, to make back money their clients may have lost in the downturn. The marketplace is too often led by emotion, Pitcairn says. He recently heard from an equity analyst whose research found that despite the strong returns we saw in 2009, the typical individual investor really didn't participate in the rally.