Financial Planners’ Reflections on 2008

I recently attended a meeting of financial planners in Northern New Jersey. Ordinarily, we meet once a month to listen to presentations given by experts on a variety of topics such as insurance, portfolio management and estate planning. This time, though, our group met specifically to discuss the recent upheaval of the stock markets and how that has affected, not just our clients, but us. (It’s been a very stressful year for planners.)

The members of our group are very experienced, individually and collectively, and they take financial planning and investment management very seriously. The consensus was that almost everyone has been adversely affected in some way or another by this year’s stock market decline. “It’s been a humbling experience,” said one planner.

Some members of the group expressed dissatisfaction with various mutual fund managers. Others revealed that they have revised their asset allocation recommendations, according to their changed outlook for various asset classes.

Here are some observations of general interest:

A great many people are genuinely frightened about the current economic situation, perhaps because the media continuously emphasizes the bad news. Some clients believe, rightly or wrongly, that the bad news will likely continue and things will probably get worse.

As various Wall Street industry icons went out of business, some clients became concerned about the financial stability of their custodians and Money Market accounts. Fortunately, planners were able to reassure their respective clients about these issues.

Planners are referring to 2008 as a “black swan” event, a comparison drawn from the book, The Black Swan: The Impact of the Highly Improbable  by Nassim Taleb.

While diversification is a valuable strategy in a typical year, 2008 has been anything but typical. As one participant said, “Diversification works over time, but not every time.”

While 2008 was a very difficult year, it was not totally unprecedented. Planners with long memories looked back to 1973 – 1974 and 1987 for some solace. Those were also difficult times, but we got through them.

All planners agreed that it was time to revisit their clients’ Investment Policy Statements and their personal financial plans.

One planner admitted to being right about one issue (investing in commodities), but not necessarily for the right reasons. (It was that kind of year.)

Naturally, the Benard Madoff mess came up. Providentially, the clients of only one manager were affected, and then, only by a very small amount. In this particular case, diversification definitely paid off.

Special concern was expressed for those individuals who have recently retired or are just about to retire. The markets may not recover in time enough for these people to fully and thoroughly enjoy what is supposed to be their golden years. As these retirees draw down funds, they will have less and less available to keep invested for the eventual rebound which most people expect. Various strategies were discussed for retirees.

Some technical issues were discussed such as Roth conversions, tax loss harvesting and the best strategies for rebalancing, when markets are volatile and people are worried.

One planner expressed concern about municipal bonds, since many states are under heavy fiscal and financial pressure.

The group consensus was this: We will all be very relieved to say goodbye to 2008.