Roger Wohlner
On August 1, 2008, my oldest child had just turned 20 and was about to enter her junior year of college, our middle daughter was busy applying to colleges, and our son was happily contemplating being the only child at home. Oh yes, and the stock market decline (crash?) of 2008-09 was creeping up on us.
By the time the stock market bottomed out on March 9, 2009, the S&P 500 had fallen from its 2007 peak of 1565 on October 9, 2007 to a closing low of 677. The index closed at 1362 on June 30, 2012, a gain of 101 percent from the March 2009 lows.
Over the past four years, I have read much about the failure of financial planning, about how models and tools such as Modern Portfolio Theory (MPT) are worthless, and about how the 401(k) is a failure.
I view these discussions as extremely healthy. As financial advisers, we should question ourselves and the tools and methods that we use to serve our clients. I have been in this profession since 1996, and I question my assumptions and methods on a regular basis.
On the other hand, many of the articles in the press have struck me as a knee-jerk reaction to a period in the markets and the economy that we had not seen since the Great Depression.
I think many of these articles and (in some cases) pronouncements are missing the boat. Whether we are talking about MPT, Monte Carlo simulations, retirement planning software, asset allocation software, or other tools, the point is that all of these things are tools, nothing more, nothing less. No adviser worth his or her salt would take the output of any one model or analysis tool and provide advice to a client solely based upon that single output. Rather, most advisers use several tools in combination as a guide, and client recommendations are ultimately made based upon the information from our software and tools combined with our training, experience, and judgment as financial professionals.
I readily concede that few financial tools predicted or prepared investors or their advisers for the speed and the fury of the 2008-09 market drop. Let’s say they had. I’m curious as to what these folks would have advised investors to have done differently:
Allocate portfolios in a fashion consistent with client goals and risk tolerance? A great suggestion. Shouldn’t we have been doing this all along? I know this has always been my practice with my clients; likewise with most of the advisers I know. Many investors got hurt because they were taking on far more risk than was appropriate for their situation. The drop in the markets just amplified the situation. Those clients with properly devised portfolios certainly got hurt in the short-term, but based upon my experience, most recovered their losses rather quickly.
Get out of stocks and move to cash and treasuries? Great strategy in 2008; not so great in 2009. As for the “smart money” having largely gotten out of stocks, many of these folks locked in huge drops in the value of their portfolios. My question is when did these folks get back in, if ever? They likely missed one of the great recoveries in market history, compounding the damage to their portfolios and perhaps to their retirement dreams. I remain convinced that market timing is a fool’s errand.
The 401(k) plan is broken and should be abolished? Time Magazine ran a major story to this effect a couple of years ago; I’ve seen several others of a similar vein since. Personally, I have many clients who have amassed very nice nest eggs using their 401(k) plans as their primary retirement savings vehicle. Do 401(k) plans need some revamping? Absolutely! This year sponsors are required to provide plan participants with disclosures as to the costs and relative returns of the investments offered by the plans. After the close of the third quarter, most participants will see the next round of fee disclosures on their quarterly account statements. These disclosures will show in dollar terms how much is being deducted from their accounts to pay the costs of running their 401(k) plans. This should be an eye opener for many. The positive aspect to this is that a number of plans have made some improvements in advance of these disclosures.
The market meltdown of 2008-09 was a major event for investors and financial advisers. Questioning that leads us to new and better ways to serve the needs of investors is very healthy. However, those whose purpose is to tear down the financial advice profession to push circulation/viewership or otherwise advance their own agenda may be doing the investing public more harm than good by promoting fear that will prevent many investors from seeking the professional help and advice they desperately need.
As for our household, four years later, our oldest has graduated from college and has been gainfully employed from day one. Our middle one is looking ahead to another senior year and thinking hard about the next steps in her life. Our son is enjoying the run of the house as the only child living at home for the summer.
Roger Wohlner, CFP®, is a fee-only financial adviser at Asset Strategy Consultants based in Arlington Heights, Ill., where he provides advice to individual clients, retirement plan sponsors, foundations, and endowments. Read more about Roger here.
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