ALBERT HERTER

‘HOW TO LEARN FROM THIS YEAR’S LOSSES,’ from MarketWatch / Dow Jones at fidelity.com.

In Uncategorized on September 16, 2009 at 22:02

Diversity, liquidity, discipline, savings are lessons learned.

BOSTON (MarketWatch) — It’s been a year of incredible pain and losses for ordinary Americans everywhere. It will be for naught if we don’t learn from it.

But what are the big lessons? I asked professional financial advisors for their take.

“The traditional 60/40 [stock/bond] portfolio is traditional for a reason — downturns happen,” says David Hultstrom at Financial Architects in Woodstock, Ga. “Very few people should be 100% in equities.”

Really bad markets come every decade or two, he says, and when they do “everything, [other than cash and short-term investment-grade fixed income], will decline by approximately half. There is nothing you can do about this, other than be prepared.

“The high returns [on average] of risky assets come because of this,” Hulstrom says. “Those that can take the volatility are generally rewarded [it is called risk for a reason though]. The diversification that matters in a bear market is the diversification between risky and non-risky assets.”

Steve Podnos, at Wealth Care in Merritt Island, Fla., takes a similar view: “I think that the biggest lesson is that markets [both bond and stock] are more volatile than we have assumed over the last few decades.”

He adds: “In addition, the power of diversification may not be as strong as we have assumed. Given both of those thoughts, the prudent investor must think ahead and have a plan to deal with a more volatile portfolio in advance to avoid panic [or] greed.”

Losses, liquidity

Many investors made two discoveries during the crash, says Beth Gamel, at Pillar Financial Advisors in Waltham, Mass. They couldn’t handle losses as well as they had predicted, and they needed more liquidity.

“With clients’ risk tolerance, they all came down a notch” during the crash, she says. As for liquidity: People need to make sure they have enough cash to live on, and they should be careful about investing in illiquid assets — such as real estate, hedge funds and private equity — that they can’t sell in a hurry when things turn sour.

A lot of the lessons were about liquidity, agrees Jonathan Sard at Sard Wealth Management Group in Atlanta.

“People really do need to consider that cash is an asset class when investing,” he says, “and they absolutely do need to have an emergency fund set aside. Cash held up, it kept your powder dry, and it gives people greater comfort when the market does go down.”

A number of advisors said that the biggest lesson was on the need to have a financial plan and to stick to it.

For Rick Rodgers, at Rodgers & Associates in Lancaster, Pa., “the biggest financial lesson people should learn is to make sure they have a written financial plan.” The people who didn’t were the ones who panicked and sold out.

Now they are sitting in cash “wondering if they will ever be able to retire. Those that had a plan should be sticking to it. Maybe they will need to delay retirement a year or two because investment returns are currently below expectations. But a well-written plan would allow for minor course adjustments to achieve the goal.”

“A prudent financial plan is the rudder that steers you to your goals and allows for a change in course when necessary,” agrees Edward Gjertsen at Mack Investment Securities in Glenview, Ill. “Most people don’t have a plan. If things go bad, it’s difficult to realize the negative financial impact their decisions could bring. Being without a rudder in a storm does not leave one with many options.”

Plan and be disciplined

Gordon Bernhardt, at Bernhardt Wealth Management in McLean, Va., adds. “Have a plan. And you have to be disciplined. You’ve got to continue to invest, even when you don’t want to.”

Michael Kalscheur, at Castle Wealth Advisors in Indianapolis, questions those who have given up on the stock market, or on the merits of diversification. “The market did not change fundamentally,” he says, “so our planning should not either.

“The real lesson to be learned is that plain vanilla works,” he says, “things like putting three months of your salary in an emergency fund, living below your means, saving 10% — 15% of your income for retirement, paying off the mortgage in 15 years and owning boring things like CD’s and immediate fixed annuities as part of your retirement investments.”

And Lauren Lindsay at Personal Financial Advisors, in Covington, La., looks at the debt mania that helped bring the economy into crisis. Her take? “Don’t spend it if you don’t have it. We are finally living in a society where it is acceptable to be a saver. If you look at anyone who was impacted by the Depression, they learned that lesson a long time ago and never forgot it.

“Also, if it sounds too good to be true, it probably is. I think people are really researching more about investments, advisors, mortgages, really everything and I think this is a great trend,” she said. “Nobody cares about your money as much as you do. I still think financial education should be mandatory in the U.S., so people can make educated decisions to help themselves.”

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