Post-Bubble Reality

Sometimes an article comes along that is so well written that you are delighted to run it even when you strongly disagree with its conclusions. That's what happened when Mitch Anthony submitted a feature, Stairway To Heaven, on page 60 in this month's issue.

You can read the article and decide for yourself. I think you'll find it provocative and compelling. Without spilling all the beans, I can tell you that one of his conclusions is that if advisors were to really listen to their clients, they would allocate a larger percentage of client portfolios to fixed-income assets and correspondingly less to equities than most currently do.

The last few years have taught advisors many lessons, and one of them is to listen more closely to what clients say, as well as what they internalize but don't or can't articulate. In late April, I moderated a panel at our Retirement Planning Symposium in Las Vegas on retirement investing and discovered that even the most client-centric advisors may see a disconnect between some traditional tasks of the practice and reality.

Norm Boone explained that he stopped giving a lot of credence to risk-tolerance questionnaires because he started to realize clients gave the answers they thought they were supposed to give. In one of the conference's opening keynote speeches by author and Financial Advisor columnist Nick Murray, he noted that stock markets on average suffer a 30% decline once every five years. After Murray's talk, another panelist said she often discussed the possibility of a 20% or 25% correction with clients, but never mentioned the Big Three Zero. She also confirmed something Lou Stanasolovich has frequently mentioned about what clients instinctively feel but fail to communicate: That at some level, clients expect you to manage risk. A key source of the disconnect is that clients fail to pinpoint or articulate their biggest fears.

My problem with Anthony's reasoning is both technical and philosophical. First, I'm no market timer but all signs are that bonds are priced like the Nasdaq in early 2000 as I write. One of the smartest and more bearish financial advisors, Michael Martin of Columbia, Md., says he can now find stocks with 4%-plus yields that are likely to rise over time, and they look attractive compared to bonds. Second, studies show that bonds, over the long term, are just as volatile as equities. Indeed, Jeremy Siegel has said bonds' 30-year standard deviation is higher than that of stocks.

It's clear that the turbulence of the last five years has left everyone a little disoriented, and we're just starting to regain our collective bearings. It's standard procedure to look to the past to divine the future, but I'm not sure it will be that propitious a guide. As conference participant Lewis Walker observed, most of our adult years have been spent living through two anomalies in financial history: 1) the period of rising interest rates and stagflation from 1966 to 1982, and 2) the unwinding of all the excesses of that period that spawned the bull market in financial assets from 1983 to 1999. 

By Walker's reading, we're heading to a place we've never been before. Sounds sensible to me.

Evan Simonoff
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