If you are comfortable gambling that what happened yesterday will happen again tomorrow (and you can bear the bruising of falling down those 18 stairs every few years), then the 70/30 portfolio is for you. If, however, you choose to believe that you never know what will happen next, and that you are better off being insulated against worst-case scenarios, then you might choose the 30/70 approach.
    When you play out the real percentages of return between the two portfolios in the "you never know" projection, the average return for the 70/30 allocation drops from 10.08% to 6.65%. The 30/70 allocation average drops from 8.08% to 7.38%. Could it be that over time the market rewards reasonable caution and "measured" optimism (or what some might call realism)?
    One financial planning sage offered, "But maybe they need the 70/30 returns over time to live the lifestyle they want. How do you answer that?"
    I would answer with these three thoughts:
If you're convinced they need it, make sure they emotionally comprehend what they are committing to before they commit.
    If they can't handle manic swings, they might need to reconsider what they think they'll need and then make adjustments in spending or lifestyle to compensate.
    As the preceding example illustrates, you really have no guarantee that they'll end up with more money as a result of the 70/30 over 30/70 allocation. It's all a matter of timing. Retire at the right time, and you're in luck.
    If the industry is going to continue to recommend 80/20 and 70/30 allocations, you'd better pray for the "rose garden" scenarios to come through-as clients will need the extra income to fund a 30-year supply of Pepto Bismol!

"Average" Expectations
    Perhaps we ought to be more careful how we use the word "average," because that word sets up an emotional expectation that real life experience will contradict, thereby sending the emotions into tilt. Many advisors will tell clients that the S&P has averaged 11% for the last 20 years. Emotionally that message is often embraced as, "OK, so we're going to be around 11%, give or take a few points each year." The reality is that the actual return on the S&P fell within 3% of the mean only four out of those 20 years. The other 16 years, the returns were either much higher or much lower than the average.
    This leads to either much glee or much panic--neither of which is going to lead to good decisions going forward. This has been amply demonstrated by mountains of evidence showing that over that same time frame, the average investor failed to get the average return. Investors were either driving too fast in their glee or overriding the brake pedal in their state of panic and consequently, failed to reap an "average" harvest. The proper emotional explanation upfront and accompanying allocation would have solved this problem and the unrealistic expectations that go with it.
    We might also do well to do a better job of defining and illustrating the impact of "standard deviation." The most useful metaphor I can find for understanding standard deviation is the market's roller coaster. How steep are the rises and falls? That is standard deviation. In retirement income planning, standard deviation becomes a most deviate force.
    Lewis Walker, CFP illustrates the impact this way:
    "If you had $100,000 and were taking out 8% and the market declined 10%, you're left with $82,000. The following year you need a return of 9.769 just to be able to take your 8% and stay at $82,000 as a base. To take out your 8% and get back to your original look, you would need a return of 31%." No wonder people's emotions turn to mush when faced with the realities of standard deviation.

Please Behave
    Before anyone starts quoting behavioral finance and lamenting how stupid clients are constantly buying high and selling low, allow me to ask, "Who was there to help accommodate and even make recommendations regarding this stupidity?" It's easy to point the finger at the whimsical client and to ignore those who "helped" them leap from the frying pan into the fire.
    An advisor recently said to me, "But you don't understand how hard it was in the late 1990s to tell clients that they shouldn't be buying these high-risk stocks." My question is, "Why weren't your clients better educated on the law of gravity?" It's like I've told my teenagers, "If you're going to fall for the thrill of driving 100 mph, don't expect to be able to stop when you need to." The faster you go, the harder you crash, and the more profound the consequences.
    If we help clients get a better understanding of the emotional aspects of recommended asset allocations and make emotional comfort one of the primary goals of the selected allocation, we might end up with much better conversations during the highs and lows. Today's risk assessment tools don't do the job. If you had asked clients their risk tolerance in 1999, they would've probably told you that they were aggressive or moderately aggressive--but that didn't stop them from running for the exits when the ride got rough. By and large, many common risk tolerance questionnaires are useless. It's like asking someone, "In the case of an earthquake, what would you do?" To which they respond, "Oh, I would help everyone else out first." Sure you would. Nobody can predict his or her behavior in a panic. A better way to help people understand the emotional impact of asset allocation is by using an analogy like the "Stairway to Financial Heaven" so that they can "feel" the impact of their choice. You can't feel enough with these risk tolerance profiles to make an honest decision. Go back and check your clients' answers to those risk profiles, and see for yourself how many of their answers corresponded with their actions throughout 2001-2002.
    This essay is about emotion. I believe that the industry has failed to paint the proper emotional context for the recommendations it has been making to clients regarding asset allocation.
    Now is the time to become emotionally forthcoming about how rough this ride might feel and what happens when things don't work out the way they are illustrated on four-color laminated brochures. All the optimism in the world won't soften the landing of a bear market or major retraction. Do your best to demonstrate what these allocations are going to feel like over time (think of it as "market emotion projections"), and you might possibly see clients choosing the mirror image of the allocations that have been historically recommended for them. It may surprise you to know that of the 50-some people I tested this theory on, almost all of them were financial advisors--and 70% of them were CFPs.
    When you frame the choice in emotional instead of mathematical terms, people are going to make different choices--real world choices. Nothing is more real than the emotions people feel when they are losing their hard earned wealth. Mathematical and logical reasoning leads people toward making conclusions, whereas, emotional reasoning leads to people making decisions. It's time to present asset allocation in a manner that makes emotional sense. After all, what fun is the ride and "getting there" if the experience is filled with nausea?

Mitch Anthony is the author of Your Clients For Life, The New Retirementality and Your Client's Story and is a regular keynote speaker at industry events.

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