Advisors may never find more clear (and less crowded) access to the highest levels of sustainable achievement than exists today. The prerequisite for that success may simply be the courage to stand squarely against the public consensus. But the potential reward is enormous. Herewith, some realities to consider-and the steps to take-in order to realize this potential in your practice and in your life.
1. Accept that your book is cooked.
Unless you're already at the top of the profession, and/or getting all the referrals/introductions you can handle, it's unlikely that your current book of business is going to get you where you need to go. Most clients, not to mention most advisors, are so terminally fatigued by the volatility of the last five years that they're incapable of dynamic action. You'll have to start prospecting again. But that will never be easier, if you narrow your focus and concentrate your effort as follows:
2. For at least the next five years,
forget about everything but retirement income planning.
During just those five years, something like 17 million Americans will retire. Half of them may have no meaningful retirement savings at all, but the other half have, in a manner of speaking, all the money they've saved in a working lifetime. And they have to move it-from the accumulation phase of life to the distribution phase. After the shocks of the last five years, you may find them more confused, and therefore more open to strong but empathetic advice, than they've ever been. Resolve to focus on being that strong yet empathetic friend.
3. Tune out current events.
Retirement is, for the average boomer couple, a three decade challenge, not an exercise in economic prognostication or market timing. Nothing could be more irrelevant to sound planning and decision-making for three decades than today's headlines, good or bad. "This time is different" isn't a useful investment policy; seek the lessons of history.
Past performance is no guarantor of future returns. But, as Lyndon Johnson's biographer Robert Caro recently said, "The power of history is in the end the greatest power." When today's retiring boomers were born, the S&P 500 was around 20. Even 30 years ago-one normal, two-person boomer retirement ago, that is-it was about 120. That kind of real-life perspective can breed faith and calm; the "news" is unlikely to engender anything but terror. One of the most important lessons of investment history is that a lot of volatility-either below or above the long-term trend-has usually turned out to be temporary. Perspective, not prediction, should be the stock in trade of today's contrarian.
4. In three decades of rising living costs, a purely fixed income investment strategy probably can't be the whole solution.
To preserve investors' purchasing power over 30 years, assuming only trend line inflation, investment income may need to increase about two and a half times. Bonds, CDs, cash, money markets and fixed annuities haven't historically done that with any real consistency. Quality equities-via dividend increases and appreciation in value-have historically been better at defending purchasing power. In your discussions with prospects, treat retirement income as the purchasing power problem it is. Today's retirees-children of the children of the Great Depression that they are-will often tend to place too much emphasis on shielding their capital against any fluctuation, and not enough emphasis on the long-term effects of the erosion of purchasing power. Be the antidote to this thinking.
5. Relative values are historically compelling.
Corporate earnings have long since made new highs, and the cash positions of major corporations, as a percentage of assets, have increased to levels not seen since the early 1950s. Yet as I write, the earnings yield of the S&P 500-the current consensus earnings estimate of $105 divided by the current price of 1320-is just under 8%, while the 10-year U.S. Treasury bond yields about 1.75%. By that measure, equities have rarely been more undervalued relative to Treasury bonds-or bonds more overvalued in relation to equities, if you prefer-than they are currently.
Valuation isn't any kind of reliable timing tool, and global economic uncertainties surely abound. But the contrarian advisor may conclude that the uncertainties, being well-recognized, might to a significant extent already be priced in. And he will remind prospects that uncertainty has usually turned out to be the friend of the long-term investor.
6. Mutual fund flows signal historic extremes of "risk aversion."
According to the Investment Company Institute, domestic U.S. equity mutual funds have, from the beginning of 2007 through April of this year, experienced net redemptions in excess of $500 billion. During the same period, bond fund assets have doubled to over $2 trillion.
These trends might have been understandable when the equity market was experiencing its historic collapse in 2007-2009. What gets a contrarian's attention is the fact that they have persisted through a virtual doubling of the equity market from its March 2009 lows. Again, the world's well-documented problems-and the persistent volatility of the equity market-have surely contributed to this flight to safety. But often in the past, great waves of enthusiasm as well as of dread-manifested in the public's interest in, or flight from, equities-have, if anything, turned out to be a contrary indicator.
7. Skate to where the puck is going to be.
Wayne Gretzky famously said that most players with whom he competed tended to skate to where the puck was; he tried to skate to where the puck was going to be. "Risk aversion" and a profusion of products claiming to be worthwhile "alternatives" to mainstream quality equities are certainly where the advice industry's puck currently is. My experience over 45 years in the business suggests that this may not be where the puck is going to be. If I've learned one thing, it's that you can advocate for equities when they're undervalued, or you can advocate for them when they're popular. But you can't do both at the same time.