But we can deal with this, Virginia. Life is still good. I know, it takes money to retire, but there are things you can do to assure your financial security. Practical things that people have done over the years, like saving a little more, working a little longer, spending a little more prudently and building a creative, diversified portfolio. There, there, Virginia. That's not so bad, is it?"
Not so bad? Hey, are we forgetting? This is America, land of opportunity, home of the free and the brave! Isn't this still the most prosperous and most resilient economy the world has ever known? Of course it is! But let's not confuse opportunity with a free lunch.
I realize that part of why I wanted to believe in Santa Claus, as a kid, was simple greed. New skates, cowboy boots; who wouldn't want to believe? In much the same way, investors today want to believe that the heady days of the New Economy are a permanent reality. Who wouldn't? They like retirement models that assume consistent double-digit equity returns. They like to hear their advisor assure them that "over long periods of time, stocks will always return more than bonds." But as advisors, we should be aware that at age 60, five or 10 years can seem a very "long period of time," and subnormal returns in an index fund can shatter retirement dreams.
Even when my eight-year-old self was confronted with the evidence, I didn't immediately embrace the Santa-free reality. I tried to keep my selfish faith intact for one more season. Investors who rode the fantastic 18-year wave of stock-price gains came to believe that constantly flowing, abundant returns were reality. Today, many clients are finding it hard to accept the past year's evidence and the quantitative ponderings of respected investment thinkers that this was a once-in-a-lifetime experience. So pleasant was that era that even some seasoned advisors don't want to admit that the last few amazing years were "real" only in the imaginations of millions of players. As Harold Evensky puts it, "The recent stock-price performance is neither a result of real asset pricing or a new paradigm economy. The explanation is behavioral." I think it is a retirement advisor's responsibility to help clients re-examine their belief systems.
The late, great bull market lasted much longer than most children's belief in Santa Claus. But that doesn't make it a permanent reality. Eventually, we learned that not only is Santa not going to come down our chimney, but more sobering yet, we are the Santa our children expect. We went to work to earn money to buy their Barbies and in-line skates, which were made not in the North Pole, but in China! Similarly, our clients have to provide their own retirement security. If they are fortunate, they will have the help of an advisor who understands that the stock market is not Santa Claus. It is part of a complex adaptive system for allocating capital to its most profitable uses.
As advisors, we owe our clients a sober appraisal of the risks and opportunities inherent in capital markets. We need to build realistic return assumptions into our retirement projections. And we owe them a thoughtfully diversified investment portfolio. We must again consider active management of equity portfolios and, yes, Virginia, even bonds.
In the long run, reality will serve us better than myths. If you don't believe me, ask my sister!
J. Michael Martin, JD, CFP, is president of Financial Advantage in Columbia, Md.