Is it different this time?    You've been trained to invest for the long term. You've conditioned your clients not to flee at the bottom of a bear market. You've constructed your clients' portfolios based on Markowitz, Sharpe, CAP-M and diversification. But the question always remains.
Is it different this time?

Interviews with some of the best thinkers in the investment advisory field suggest, yes, it is indeed different this time. The recession is different. The markets are different. The problems facing Americans are different.   

What follows are abstracts from interviews with seven leading advisors and analysts, all experienced, successful thought-leaders in the business of investment advice.  

William Bengen, a certified financial planner, is the man behind what has become known as "the 4% drawdown rule." In 1994, Bengen wrote a watershed article in the FPA's Journal Of Financial Planning. He subsequently published three related articles on the topic. His exploration on "safe" withdrawal rates for retirees, which is based on historical data and asset allocation models, is considered groundbreaking. Which makes his reaction to recent events all the more troubling.

"I've been concerned for some time," says Bengen. "I've raised more cash in client portfolios than at any other time in the past. I've never felt this uncomfortable about what's happening in the American economy." Bengen started managing money in 1975. For lifestyle reasons, he manages only $50 million and does not accept new clients.

On average, his portfolios have allocated 45% to bonds, 35% to stocks and about 20% to money markets.   

"There are risks in the economy and financial system that I cannot get a handle on," says Bengen. "And if you cannot assess risk, you can't manage it. So why try?"

In the 2000-2002 bear market, Bengen says he could find good investments in small-cap stocks, REITs and foreign equities. "Now, I'm in defensive stocks like Johnson & Johnson, Berkshire Hathaway, and some commodity and metals mining stocks," he says. And if the American economy declines and brings other economies down with it, he fears commodities stocks will also lose their safe-haven status.

Bill Carter, who began his career in the throes of the 1973-'74 bear market, says the problems facing investors are more serious than any he's seen in his career. "But I think the worst of it is behind us," he says.  Carter went down a list of "serious times" he's successfully managed through including the S&L crisis, which pummeled his Dallas-based clientele, and says, "Every time we go through one of these things
it seems like the worst one.

"I'm a believer in cycles," he says. "It doesn't matter what causes it, we go through them and we have always worked out of it. I've been doing this for 35 years and I've always made more money in down markets than any other time."

Carter says he expects choppy markets in the months ahead as financial companies announce more write-downs on bad loans. "The market doesn't know how to price these securities and that's why we're seeing such volatility in stocks.   

"I like it when there is turmoil," he says. "That's when you can buy into the market on the cheap."

Tom Connelly manages about $225 million for individuals who meet his $2 million minimum. A chartered financial analyst and CFP with a master's in financial planning, Connelly says that for the first time in his 20-year career as an investment manager, he has positioned client portfolios to an equity allocation below what was specified in their investment policy statements.

"Right now, counterparties in the financial system are worried about whether the other counterparties can handle their commitments and obligations," says Connelly. "They don't trust each other.

"Most of the press and everyone else is saying this is part of the subprime mess and maybe we'll have a recession and then get out, and stocks will go back up like they always have," says Connelly. "But all prognosticators and pundits every step of the way have underestimated the duration and magnitude of the subprime mortgage problem. We went from tens of billions of anticipated write-offs to hundreds of billions, and now Goldman Sachs is saying it will be over a trillion dollars of write-downs."

Connelly is concerned that, in addition to subprime mortgages, the market for complex securitized debt instruments invented in the last decade-credit card, auto and student loans packaged and sold to investors-will come undone along with loans to real estate and private equity funds. "Then there's $45 trillion of credit default swaps, and no one knows who owns them, plus you don't need to keep reserves against them and they were bought on margin and levered immensely," says Connelly. "I'm worried we may be underestimating the effects of this."

Connelly says a 1930s style Depression is unlikely, but he is not sure how the debt crisis will unwind and says that we are only in the third or fourth inning of this dangerous game. "I'm not saying there will be a catastrophe, but I believe we have gone from a 1% to 3% chance of a catastrophic event in our financial system a year ago to a 25% or 30% chance.

"While the Fed has done a fantastic job, it's not clear to me how it can prevent asset values from falling," says Connelly. "It could provide all the liquidity in the world. But if no one wants to borrow, what good is it? If asset prices are dropping, why would you borrow money to buy a home or invest?"

The fall in stock prices through April 10 was not enough to impress Connelly. "We've had a normal pullback," he says. "This looks like it could become worse. I haven't seen anything like this in my career, and I'm not aware of anything looking the same historically.

"It may pass and I could be overreacting, but the mere fact that the problem looks so big and doesn't seem contained yet is enough to make me exercise caution," he says. "Stocks for the long run is still the most likely scenario. But what if it isn't?"

Almost every single economic indicator is declining markedly, he says. "And when we go into a recession with all the debt out there, this could be worse than your mother's or grandmother's recession.

"The consequences of being wrong could be really nasty," he says. "You have to entertain the possibility that things are different this time because we have not seen anything like this before."

Jerry Gray, chief investment officer at MAI in Cleveland, which manages about $1 billion for high-net-worth individuals, including some of the nation's best professional athletes, is worried. "We don't want to paint doomsday or panic scenario, but the next three to 12 months will be tough sledding."

While consumers for many years were able to borrow against their homes or pull gains from the stock market-or just feel wealthier because of the appreciation in those assets-that has ended. Consumers have run up their credit cards to the hilt, consumer debt as a percentage of disposable income is as high as it has even been, and banks and lenders are less likely to make loans, Gray says. "There is no place for consumers to go to continue their spending ways, and consumer spending is 70% of GDP," says Gray. "So our economy is likely to see flat to negative GDP growth for six months to a year."

With stocks down 12% from their all-time high and 7% for the year, Gray believes prices have yet to fully discount the recession. "Stocks could decline another 10% or 12% to fully reflect the damage," he says.

"The consensus forecast is that we will have a short, shallow slowdown, but we think it's going to be more painful than that." Gray says the Fed, by stating publicly that it will do whatever it takes to bail out troubled institutions, has likely avoided a deeply painful short-term panic and disaster scenario, but that the pronouncement itself reveals how dire the situation is. "And that won't fix the problem of the housing inventory being twice the level that it should be," he says. "That will take at least a couple of years to work out, so we're in for a longer period of slow times."

Gray says MAI's investment committee has lightened its stock exposure to the low end of allocations specified in client investment policy statements, and is specifically lighter on financial and consumer discretionary issues. "Eventually they will bring opportunity, but we think it's still too early," he says. Companies with large overseas exposure are attractive, he says, because growth will be stronger in Europe, Asia and South America than in the U.S.

Municipal bonds with a rating of A+ or better and backed by an insurer to gain a 'AAA' rating have been attractive, Gray says, because they yield 5% or 6% as a result of the credit crisis. Convertible bonds that sell at $80 but pay $100 if the issuing companies are bought are also out there, he says, and many of the issuers are likely to be acquired.  

Tim Kochis is one of just a handful of advisors active in the financial planner world who has created a multibillion dollar asset management firm. Kochis Fitz/Quintile manages $5 billion.

Kochis seems to have been prepared for the seemingly sudden change in sentiment gripping the U.S. stock market and economy. "If you perceive yourself as just being a citizen of the U.S., you could have a more pessimistic outlook than a citizen of the world," he says. "We don't see the U.S. as the only game. It's a worldwide game, and we have overseas allocations in client portfolios that are typically in the 40% territory." Kochis stresses that global diversification for his firm has been not a tactical but a strategic decision, taken many years ago. "We took a lot of heat in 1998 and 1999, when global markets did not keep pace with the U.S.," he says.

And Kochis is quick to say that he is not an optimist about opportunities in the U.S. "We fully expect that the average American in 20 years will be wealthier than today, enjoying longer life span, better health care and more toys," he says. The issue is not absolute wealth but relative wealth, he says. Twenty years from now, a much larger part of the world population will have computers and cell phones and enjoy more of the world's wealth.  "The U.S. may be at the top of the heap for the next 25 or 50 years but there is no right the U.S. has to be at the top of the heap forever," he says, "and when it is not at the top of the heap, it is not the end of the world if the U.S. is no longer the center of the world's economy. The Dutch were at the top of the economic heap in the 17th century and are very happy today even though no one looks at Amsterdam as the center of the economic universe."

Jason Thomas, chief investment strategist at Kochis Fitz/Quintile, says bubbles have always been a part of economic history. He says the correction in investor sentiment is analogous to the behavior of drivers leaving Las Vegas. On a stretch of highway in the desert where you can see for miles ahead of you, skid marks appear on the open road. Thomas wondered why. So he pulled over and observed the spot. "People became overly optimistic about how fast they could drive and they realized it and slowed down," says Thomas. "But the drivers behind them don't know how much to slow down, and when a car in front of you slows from 80 to 75, you have to slow from 80 to 70 to be safe. That's what we're seeing in the capital markets, where people don't know how much to slow down even though visibility and conditions seem fine."

The firm's client portfolios typically have a 10% position in less-developed economies, 30% in developed foreign countries, 35% in U.S. stocks (with little or no allocation to bonds), and 15% in alternative investments.

Richie Lee, whose RIA, Lee Financial Corp., manages $1 billion, was one of the first graduates of the College of Financial Planning. He began his career just months before the '73-'74 bear market started.

"We certainly have a serious situation on our hands now," says Lee. "But the world is not collapsing and it's not like we have not been through things like this before."

Lee says that in the early '80s, oil stocks at their peak prices constituted 30% of the market capitalization of the Standard & Poor's 500, and technology stocks at their peak in early 2000 accounted for 30% of the S&P 500 market cap. In both instances, the mania about these sectors subsided and they reverted to a much smaller share of the S&P 500 value. At their peak in 2007, financial stocks accounted for 30% of the S&P's valuation, but they have recently collapsed and accounted for about 20% of the value of the S&P 500. "What we're seeing is nothing new," he says.

"But if you happen to be in your 60s, then for you things are different this time," he says. "Even if the economy and the markets come back and things are great 10 years from now, suffering big losses in your principal just before or after retirement is something you may never recover fully from."
"In a period when we have a larger percentage of our population than ever heading toward retirement-a generation of Americans expected to live longer than any previous-we are experiencing a gut-wrenching reversal," says Lee. He says many new retirees may have to go back to work if the stock market continues to drop. Front-loading retirement savings with earnings of $30,000 a year is equivalent to investing $1 million and earning 3%.

Lee predicts that just as income statements in recent years have become the focus of corporate America, balance sheets will be the focus for the next few years. He is encouraged by how quickly big financial institutions like Merrill Lynch and UBS could attract foreign capital infusions after announcing their huge write-offs of bad loans. "There's about an $800 billion surplus of oil money every year and it has to go somewhere," Lee says. "It's the process of globalization."

Lee recalls the gloom that descended on America in the late 1970s, when inflation was high, growth was low and America's prestige was tarnished by Vietnam and Watergate. Pundits predicted gold would rise to $3,000 an ounce, he recalls. "If you bet that thinking that way would save you, then you would have created the disaster instead of avoiding it," he says.

"The problems we face are different this time," says Lee. "The issue isn't having the biggest economy in the world; it's having the best economy in the world, and nowhere is a system more adaptable than in the U.S.

"Nowhere else can you find the legal, capital and talent creation systems that we have here," adds Lee.

His portfolios are broadly diversified, however. Lee's firm creates partnerships for its clients, and most portfolios have between a 25% and 35% commitment to hedge funds. The portfolios typically have a 5% to 10% investment in companies that build bridges, roads and other infrastructure worldwide and that offer a yield of about 8%, and the firm has a similar investment in energy and natural resource stocks as well as Treasury Inflation Protected Securities. "We're prepared to deal with this because we are never willing to bet a client's portfolio that we're right," says Lee.

Lee says he goes to a bookstore once a month, skims the introductions of five to ten books from the business section, and picks one or two to read. He also regularly reads the Financial Times, The Economist and The International Herald Tribune.

Robert Levitt puts his money where his mouth is. In fact, he's put his whole self there. Levitt moved to France last June and spends six months of the year traveling around the world scouting for investments. "We invest thematically in common sense ideas globally," Levitt says in an interview via Skype from his hotel room in Dubai. Levitt Capital Management is still headquartered in Boca Raton, Fla., but he is seeking to build on its $500 million of assets under management by luring clients who meet his $3 million minimum and live anywhere in the world. "It's difficult to be in the U.S.," he says. "You have an insulated business media and it's hard to travel because everything is so far."  

Levitt says the U.S. is in a financial recession, which is different from a traditional recession caused by a buildup of inventories.  The U.S. has low unemployment and low inflation, and the economy is not in poor condition, but it is not growing. In New York, he predicts, "people will feel like they are living through a depression. It could be years before the U.S. economy recovers," he says.

Levitt believes that even as a U.S. bear market has just begun, a global economic recovery is intact. "The world is coming alive and the lights are coming on across Asia," Levitt says. "Here in Dubai, skyscrapers are being built everywhere, the Saudis are building six new industrial cities, and we are seeing the biggest transfer of wealth in history." Levitt says that the $4 per gallon gas prices Americans now face are creating wealth elsewhere. "In Kiev, all you see are Porsches, Rolls-Royces and Bentleys," he says. "And they're not using it to invest in OECD (The Organization for Economic  Cooperation and Development) this time, but to invest in their own economies. Opportunities to invest in everywhere but not the U.S. or OECD."
Levitt says financial stocks are likely to fall further. "No one knows what financial assets are worth," he says. He is bullish on commodities and dismisses the notion that they are vulnerable should developed-country economies fall into recession, believing that less developed nations will keep driving demand. "There are 500 million people in India alone who still don't have electricity," he says. He is most bullish on agricultural stocks and is invested in Brazilian, Russian, Norwegian and Israeli agribusiness as well as U.S. companies. In fact, the 8% of his assets invested in the U.S. are all in the agribusiness. Meanwhile, the intrinsic value of oil makes him bullish on the stock markets of members of the Gulf Cooperation Council. He believes GCC economies-Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and The United Arab Emirates-could be in the early stages of a secular bull market of the same magnitude as the U.S. bull market from 1982 to 2000.  

Andrew Gluck, a longtime writer and journalist, is CEO of Advisor Products Inc. (www.advisorproducts.com), a Westbury, N.Y., marketing company serving 1,800 advisory firms.