In the last great romantic novel of the 20th century, The Russia House, John le Carré calls one of his protagonists "the determined primitive, as people who deal in human nature have to be." (The emphasis is, in every sense, mine.)

Almost 20 years ago, I used a longer version of this characterization as the epigraph for my first book-length exploration of the investment advisory process, Serious Money. My point then (as now) was that we financial advisors deal above all else not with economics, nor with the capital markets, nor with tax and estate laws, but with human nature. And to do this successfully-which means nothing more or less than to help families achieve a financial peace which they could never find and keep on their own-we must become that determined primitive.

Hence, I confess that gauzy intellectual abstractions like modern portfolio theory and the efficient market hypothesis passed me right by. Moreover, I thought and think that anyone who was fool enough to believe there was such a thing as a "standard" deviation deserved everything he got. I never understood what any of those higher-mathematical chimeras had to do with the craft of advice, which for me is a very simple but devilishly difficult life's work: persuading people to do with their money what they need to do with it rather than what they want to do with it, in the full knowledge and acceptance that these two things are always and everywhere antithetical.

Finally, I have never attached any psychological or even demographic credence to the idea of the baby boom. When Rudy Giuliani (b. 1944) and I (b. 1943) were seniors at Bishop Loughlin Memorial High School in Brooklyn in 1961, were that year's freshmen (b. 1946) in any important way different from us? Did we not have the same upbringing, from parents whose lives had been scarred if not shattered by the Great Depression? Was their outlook on life, on money, on risk and safety, any different from ours, and is it any different today? Did we panic out of equities in 2008-09, and they not?

No; we were and are all the same. All of us are being forced to make the big retirement income decisions regarding our savings and investments, and  all are in the same terrible quandary. I suggest that dealing effectively with this quandary will be the essential career challenge to the personal financial advisor for at least the next ten years.

Of these millions of people, now being cattle-prodded into retirement, the advisor may with certainty say three things. First, they are three years older than they were three years ago, when the equity market topped out. Second, in the ensuing cataclysm, they lost those three years, which they most certainly could not afford to lose in the run-up to retirement. And third, they have less money saved for retirement than they did three years ago-because sometime between then and now, when their retirement nest egg had declined 30%, 40% or even 50%, they panicked out. And are, by and large, still out, if they're not actually-in the wake of the "flash crash" correction of this spring-out again. 

If these people are to have any hope of regaining their financial footing, and keeping it for the rest of their lives, they must be counseled by one of us determined primitives. And they must be told-unapologetically, straightforwardly, with no hedging or mincing of words-five things.

(1) If all they are is the average couple, one of them is still going to be alive, and needing a lifestyle-sustaining income, 30 years hence. I assure you, as one of them, that they don't know this, and I state as an article of faith that it is impossible to invest successfully for a retirement you cannot imagine. But a non-smoking couple of average retirement age (62) in this country has a joint life expectancy of 30 years. This is actuary-speak for the reality that one of them will not pass until age 92, having had to fight off rising living costs for the intervening three decades. This defines the issue. We have to help people-if they'll allow themselves to be helped-realize that their time horizon regarding the retirement income problem is 30 years, and that today's alarmist headlines will have no effect whatsoever on that outcome.

(2) The determined primitive can express the essential economic reality of a 30-year retirement to his prospects in just ten words: "Every year, everything you need to buy will cost more." This is no more than a confirmation of the prospects' own six-decade life experience to date. The problem is that they are unconsciously not working from their own life experiences; they're working from their parents' horror stories of the Depression. Hence, as their parents did, they can only think of "risk" and "safety" in terms of principal. The determined primitive will work to cause them to see that their primary financial risk is not loss of principal but erosion of purchasing power, and that the mortal financial danger of a three-decade retirement is not losing one's money but outliving it. 

(3) Given these inarguable truths, there is really only one rational retirement income investment objective. It is to be able to draw from one's portfolio an income which rises through time at some function of the rate at which living costs rise. Only in that way can the rising income offset the rising living costs, thereby sustaining lifestyle, and enabling the retirees to maintain their dignity and independence-the two most important things in life as we grow older.

(4) The investments my people want to own in retirement have never done that, and by definition ("fixed income") probably never will. The investments they need to own have always done so, and probably always will. As always, the things they want to own and the things they need to own are antithetical. Having been programmed from earliest life to denominate risk and safety only as principal, the children of the children (and the young adults) of the Depression will always want to own bonds and CDs. But a purely fixed-income investment strategy in 30 years of a rising-cost life is suicide. Only a rising-income investment strategy will answer the case. And historically, the most reliable source of rising income has been the constantly rising dividends of the Great Companies in America and the World. From 1935 through 2009, the Consumer Price Index compounded at 3%. The dividend of the S&P stock index compounded at about 5.5%. Rising living costs are the problem; rising dividends are the solution. My people want to own bonds, and need to own portfolios of the Great Companies. Only the determined primitive can make them accept this. Indeed, I believe it is why we were sent into the world when we were.

(5) Accepting these first four epiphanies, my people can be induced to buy equities. Reason, logic, basic psychology and history all tell us that my people will not be able to hold equities. I am well over 40 years in the financial advisory profession; my education, training and experience are essentially in investments. If I ever thought about it-which I manifestly did not-I would have said that I would never see a day when Americans would fear equities so terribly that they would be holding more cash (in money market funds and day-to-day savings accounts, not even counting CDs) than the total market capitalization of the Wilshire 5000 stock index. In the event-on either side of the bottom of The Great Panic of 2008-09-I saw about 90 such days, for such was the depth and universality of the panic response. 

This fifth and final great truth-which the determined primitive must cause my people not just to accept intellectually but to strategize right now, at the outset of retirement-is the reality of equity volatility. The broad equity market has declined an average of 30% one year in five since the end of World War II (that is, in my people's lifetimes). I see no reason to hope that it will ever do otherwise, and every reason to believe that it will continue to cycle as it always has. The cold intellectual fact that the first of these declines started in 1946 at 19.3 on the S&P, and that-13 ends of the world later-we're around 1100, should be regarded as effectively meaningless. Indeed, it should be scorned as a fool's errand: the attempt to reason with fear.

I know of only two ways of coping with equity volatility-and with the cacophony of journalistic negativity which always accompanies it, assuring all who will listen that "this time it's different," that this really is The Big One that their parents warned them about.

One method is by an abiding faith: in the historical record, in the greatness of free-market democratic capitalism, in America, and in ourselves. And the other method-the only other practical method of which I'm aware-is what the variable annuity industry is pleased to call "living benefits." Every other method (including "asset allocation," the bizarre and historically indefensible notion that stocks and bonds can't crash simultaneously) has been conclusively proven not to work. Advisors who have elected to spend the rest of their careers in the real world-to be the determined primitives my people so desperately need us to be-have, I believe, only this binary choice.

I strongly recommend faith. It's perfectly efficient, has no cost, and has historically been proven 100% effective: those who bought equities and did not panic out of them over 30-year periods have always triumphed over the rising cost of living. (The past 30 years are a splendid example: The cost of living nearly tripled, interest available from bonds and CDs much more than halved, the dividend of the S&P 500 just about quadrupled, and the index itself is up ninefold.)

In the next breath, I acknowledge-nay, advocate for-the truth that my people, by and large, will not be able to sustain that faith. For them, we must consider the other choice: the latest generation of insurances available with variable annuities, whose essential effect is to create some kind of a floor under, but not an absolute ceiling over, 30 years of a retiring couple's equity experience. I confess that I do not regard these insurances as financial devices so much as psychological devices. I consider them a form of behavioral medication, whose effect is the all-important one of suppressing the panic response.

I am all too keenly and even painfully aware of the drawbacks to this solution, among which are (under current law) the taxation of the annuity's earnings withdrawals at ordinary income rates and the cost, which is not insignificant. (That said, to count the cost of the insurance and not the benefit is the pure essence of the Suze Orman Fallacy.) These are by no means petty cavils. But on behalf of determined primitives everywhere, I must ask: What is the alternative?

I sincerely hope the need for these insurances will, in the fullness of time, wither away. My firstborn granddaughter just turned 10; when she's my age, I hope everyone will have 1% body fat and 99% equity portfolios, and will cheerfully experience all bear markets as big sales. But I will not live to see this, and neither will my people.

So if your reading of your sixtyish prospects is that they will never survive 30 years of inflation without equities, but that they will not be able to sustain the requisite faith to hold equities, then for all its costs and limitations, you may honorably (and accurately) consider the one practical alternative to faith of which I know.

© 2010 Nick Murray. ALL RIGHTS RESERVED. Nick's strategies for prospecting "his people," and the succeeding waves of baby boomers, may be found in his new book, The Game of Numbers: Professional Prospecting for Financial Advisors, available only at www.nickmurray.com, click on "Books."