With the 2008 stock market exhibiting unprecedented volatility, do we need to completely overhaul our notion of asset allocation? And how can we better assure that portfolios created to help clients reach retirement by a given date will actually accomplish that objective?

These are the questions I posed to three recognized experts in the advisor community: Roger Gibson, chief investment officer of Gibson Capital LLC in Wexford, Pa.; Lou Stanasolovich, president and CEO of Legend Financial Advisors Inc. in Pittsburgh; and Tom Connelly, president and chief investment officer of Versant Capital Management Inc., which has offices in St. Paul, Minn., and Phoenix.

When we think back on equity market activity in 2008, we'll first remember the sheer loss of value that occurred and next the extreme volatility. Gibson provides a fascinating look at the latter. "I've never seen markets move as frequently and sharply as in the last few months of 2008," he says.

Gibson instructed a staffer to look at movements in four indices-the S&P 500, the Morgan Stanley Far East Index, the NAREIT index and the Goldman Sachs Commodities Index. "We looked at each index to answer the question, 'How many trading days did the index gain or lose 5% or more?' We found that from January through August of 2008, the S&P and international markets had no 5% trading days, while REITs and commodities had seven and five days, respectively." But afterward, from September to December, it was another story altogether. Gibson found that domestic stocks during this period moved by 5% or more on 18 different trading days. The number of days it moved by that much for internationals, meanwhile, was 28, while for REITs it was 46 and for commodities, also 18.

"There were only 85 trading days during the latter period, so commodities for example moved 5% or more over 50% of the days in that four-month period. I've never seen anything like that and I think it will hang around for a while, but I'm not sure it will translate into a significantly different standard deviation when measured on an annual return basis. And from a portfolio construction point of view, we allocate based upon annual return data."

So what are we saying here? Was 2008 unpredictable in the context of historical stock movements?

"No," claims Gibson. "If you look at Ibbotson data on the U.S. market from 1926 forward, the simple average return on the S&P is roughly 12%. Even if you assume a normal distribution, you'd expect 95% of all annual returns to fall within two standard deviations. One deviation is 20%, so two deviations give us a range of -28% to +52%. The remaining 5% of all observations would fall outside that range-half below and half above. Including 2008, the S&P fell below that range on three occasions-in 1931, 1937 and 2008. So that's pretty much on the mark. 2008 was a crazy year, but did anything crazy happen? We know those balls are in the urn, and one of them was picked."

Connelly agrees 2008's volatility was not unexpected. "In the '60s, Mandelbrot and Fama found stock markets, especially in the short run, are more volatile than our models predict. In other words, we've known this was possible because it's been in the serious literature for more than 40 years now."

What fascinates Connelly is that our age-old models for determining stock value didn't predict the 2008 market. He says, "The weird thing about this crisis we're in is there were signs in the economy, such as obvious problems in the mortgage markets, but none of the stock markets were crazily priced based upon conventional valuation metrics. They were a bit expensive based upon peak earnings metrics, but nothing like in 1999-2000. So this whole thing came out of the blue; if you'd run some valuation model, you wouldn't have seen it coming."

And even if you did, where would you put your clients' money, other than cash? Says Gibson, "We looked at the Morningstar database of 3,734 funds invested primarily in U.S. stocks and all but one lost money; the 978 in non-U.S. stocks all lost money; the 144 domestic and foreign real estate funds all had negative returns; and 128 natural resource funds all lost money. In other words, of over 4,000 equity funds, all but one lost money."

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