As you already know, your clients don’t understand much about the markets or how the economy works. Neither do most financial advisors. You can pass the series 7 exam and have no more understanding of finance than when interest rates rise, bond values fall. So it may be helpful if we all know what is happening in the economy and can guide our clients appropriately.
If you’ve been telling them just be patient, implying that their portfolio value or 401k will come back, you’re giving hope that is unfounded. It will take many years for portfolio values and 401k accounts to come back. That’s because this is not just a market decline. This is a fundamental shift from overvalued assets to a more accurate value.
Any type of bailout by the government is an attempt to ease the pain and transition but the economic transition cannot be stopped.
Your client’s stocks have been inflated and overpriced as has been their home values. Excessive credit pushes up the value of assets to unsustainable values. When the credit goes away, assets return to their truer economic value. In other words, the world returns to normal and people stop doing stupid things like buying stocks with a PE of 100, bankers stop giving 100% loans to people with low incomes, people stop buying bonds form municipalities that have no ability to repay, rating agencies stop giving ever client that pays them a AAA rating.
Therefore, the value of stocks and homes today are not the aberration. These values are normal. Stock prices now have a sensible relationship to what the company can earn or the value of their assets and home values are now prices based on the ability of homeowners to make mortgage payments. To tell your clients “be patient,” implying that the fantasy of the last 25 years will return is misleading. Sure, we again as a society will do stupid things and re-inflate asset values, maybe in 10 or 20 years, but not soon.
If you want to tell yourself and your clients the truth, here it is. You need to adjust to a lower standard of living that looks something like how Europeans live: no more 4500 square foot house in the suburbs, no more Mercedes in the driveway, no more retire at age 58. Instead, you have a 1500 square foot condo in town, you drive a Prius and eating out is something special, not a 4-time-a-week activity. You vacation through Elderhostel and not at the Ritz and if you earn 6% on your portfolio, that’s pretty satisfying.
The fantasy was great while it lasted. Welcome back to reality.
