What about the auction rate note market that unraveled over the past several months? Does this sector represent an opportunity for investors?

Absolutely not! It has proved instead to be a bad money market substitute, since it is highly illiquid at a time liquidity is needed most. So in this case, a bad investment vehicle is still a bad investment vehicle.

Investors need to understand their goals first and then seek out the best investments to try and achieve those stated goals. We often see investment goals that do not match up with the realities of the financial markets. In this case, investors will have to reduce their expected return goals in order to realign them with the market environment.

Market indices are useful in providing market information, but can be less valuable if their return profiles aren't aligned with an investor's goals.

Consider the case of an investor with a three-to-five-year fixed-income portfolio that will be liquidated in five years. The investor needs the original principal value to be maintained. The first problem is that the portfolio's performance is measured against the Lehman Aggregate Bond Index (a proxy for the bond market). Because the average maturity for this index is over seven years, it would be inappropriate for an investment objective that calls for liquidation in five years and the preservation of principal. Also, the index comprises U.S. corporate, government and mortgage debt. The risk associated with the corporate bond market may be inappropriate because of possible credit deterioration. Whether this portfolio outperforms the index is irrelevant because it does not match the client's investment goals.

There are too many examples of investors' goals being misaligned with their portfolios because of faulty analysis and construction. This happens either because the client does not have a full understanding of his or her goals or the investment advisor is too closely connected to index-based return measurement.

Neither the advisor nor the investor is at fault. The way that the industry currently conducts business needs to change. By moving away from our index orientation and closer to goals-based investing, investors stand a better chance of achieving their desired results without necessarily taking on greater market risk. The walk will still be random, but at least we'll focus on the direction we need to go in and when we need to arrive.    

Tom Sowanick is the chief investment officer of Clearbrook Financial, a Princeton, N.J.-based independent financial services firm offering investment products and portfolio solutions to investment professionals serving high-net-worth individuals and institutions.