Financial advisors often talk of "staying the course," remaining faithful to modern portfolio theory, asset allocation and diversification through the best and worst of times. Through every peak and valley, adherents of this approach maintain, equities will get the job done and provide the best long-term returns for a retirement plan.
So says history.
But history books are full of unexpected turns and, as it turns out, 2008 dished out perhaps the most shocking financial upheaval ever witnessed by modern-day financial advisors.
Even investors who dutifully followed conservative asset allocation plans saw their retirement savings shattered, with some portfolios losing 20%, 30% or more in a matter of a few weeks. Diversification provided little shelter. Panicked selling by overleveraged hedge funds brought everything down and, as the year came to a close, economists were predicting things could get worse in 2009.
It amounted to the toughest test yet for those with a profound faith in long-term equity investing. For some, the crisis created doubts, a shift to a more conservative approach. Others, not thinking this situation was possible, became more reflective. Still others, confident the crisis would pass, stuck to their long-term approach under the assumption things would eventually get back to normal.
All advisors agreed fear and anxiety were at unprecedented levels, and much of their time was spent talking their clients through the turmoil.
"You have to remember you're the one thing standing between them and some really bad long-term decisions," says Chris Jordan, president and CEO of Lexco Wealth Management in Tarrytown, N.Y.
A Passing Storm?
To those who would say the crisis proves equities are too risky to form the basis of a retirement plan, Chris Cordaro, chief investment officer of RegentAtlantic Capital in Chatham, N.J., has a favorite analogy. Imagine, he says, that a big tornado storms through a farm and sucks up a cow, a pig and a tractor.
Those casting doubts on asset allocation, he says, are basically looking at the effects of the storm and saying the law of gravity has been repealed. "We're pretty confident that when the storm passes, everything will fall back to earth," he says. "We're in a huge financial storm right now, and I'm confident that when the storm is over, diversification will start to work again."
Daniel Moisand, principal of Moisand Fitzgerald Tamayo LLC in Melbourne, Fla., also feels long-term asset allocators will get through this crisis as they got through the bursting of the dot-com bubble and the post-September 11 market. "You don't go into a plan without expecting some pretty significant market events along the way of a normal person's life span," he says. "The new retiree should expect at least a couple of declines of this magnitude."
The current crisis does differ in terms of its complexity, he says. Most people knew why the market went down in the early part of the decade. The current crisis, with the involvement of terms such as credit default swaps and other exotic derivatives, leaves the average client confused, he says. "With this subject matter, people just don't know what everyone is talking about," says Moisand, some of whose clients include NASA rocket scientists.
The severity of the damage thus far has some advisors wondering if there will be lasting impacts. No one doubts the massive impact the ongoing economic and financial crisis is having on Americans' retirement plans, particularly those of people who recently retired or who are planning to do so within the next few years.