Realistic investing making a comeback

"A Taste of Humble Pie"

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There is one bright side to the record-breaking slide of Nasdaq and the decline of other stock market indexes in 2000: It has provided a healthy dose of reality.

Clients are returning to a more realistic approach to investing, certified financial planner professionals said in the January 2001 issue of the Journal of Financial Planning.

"Diversification is not looking like a fool's strategy any more," said Harold Evensky, a certified financial planner and chairman of Evensky Group, Coral Gables, Fla. "We've stayed with it through thick and thin, even though there's been an awful lot of thin lately. But the events of 2000 certainly make it easier to persuade clients to stay with it."

Several planners interviewed in the article, "A Taste of Humble Pie," conceded that despite their best efforts to convince their clients of the value of diversification, some clients insisted on investing heavily in high-flying technology stocks or were angry because the performance of their portfolio didn't match Nasdaq highs.

Planners blamed this stubbornness on several factors. Many clients' only experience of a down market was the October 1987 crash. But recovery was so quick then that it led many clients to assume that markets will always recover quickly. Furthermore, planners are getting new, young clients — with company stock options — who have never experienced a down market.

TV's talking heads exacerbate the situation. Jay Buckingham, president of Buckingham Financial Group Inc., Dayton, Ohio, said he's been under pressure to "build a CNBC portfolio" to accommodate clients' fascination with headline-making companies.

Although the down market has tempered clients' optimism, they still tend to have exaggerated expectations, according to financial planners interviewed in the article. One planner cited a survey last summer in which most respondents still expected their stock component to grow an unrealistic 15 percent to 26 percent a year over the next decade.

And clients still complain about portfolio results. "In an up market, people compare you to how the Nasdaq is doing; in a down market they compare you to what they could have gotten at the bank," said Don Schreiber Jr., chief executive officer of Wealth Builders Inc.

He said that talking to clients about risk over the past several years was like "talking about the tooth fairy. Risk was something only old fogies believed in." But Schreiber and other planners said they will continue to preach the benefits of diversification, and they believe their clients are more open to their message than before.

Most don't expect to make significant changes in their clients' portfolio asset allocation. They'll continue to emphasize a core portfolio insulated as much as possible from volatility.

"On balance, it will be "steady as she goes' and we'll continue to stress how much diversification helped in 2000," said Mark Balasa, a certified financial planner and accountant at Balasa & Hoffman Inc., Schaumburg, Ill. "We'll say, 'Everything is down, but look — your portfolio is still up. Why? Because of bonds, small cap, value.'"

Zall, Bureaucratus columnist and a retired federal employee, is a freelance writer based in Silver Spring, Md. He specializes in taxes, investing, business and government workplace issues. He is a certified internal auditor and a registered investment adviser. He can be reached at [email protected].


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