How Much Have You Really Lost?

Back at the end of January a client, concerned about the stock market, sent me an email saying "I noted in your memo that you didn't plan on any different allocations, but I am very concerned about preserving the remaining principal. Shouldn't we be allocating into less risky options? I simply cannot have another year like last year."

This client - like many - needs objective, unemotional advice about the very personal, emotional issue of her money. In her words, 'I need you to hold my hand and talk me off the ledge.' She and I had a similar discussion in the fall when she called in and said "I've lost $300,000!" Of course, she didn't mean a long-term, permanent loss but rather a short-term, paper loss as measured since the end of 2007 when the markets had just come off their all-time highs and her portfolio peaked at $1.1 million. (Obviously, relative to all-time highs, ANY market conditions will result in a loss by comparison.)

Below is my response, edited for privacy.

Mrs. Client - I would be happy to discuss with you a more conservative allocation, and you always have the final say on investment decisions, but a few things to consider:

1. Remember that in 2005 and 06 you were concerned that your IRA wasn’t growing as fast as your brokerage account because we had all of your more conservative fixed income investments in the IRA (for tax efficiency) and your more aggressive equity investments in the brokerage account (again for tax efficiency). Had we bought more equities when you wanted to, this past 18 months would have been doubly depressing. It is human nature to want to buy something after it goes up (seeing everybody else ‘getting rich’) and to want to sell something after it tanks (avoid more losses!). Take care that you don’t ‘chase returns’ - this leads to buying high and selling low, which most people do despite themselves.

2. It’s not scientific or statistically precise, but conceptually consider this: when you started here in May 2004 you had $609,500 between your brokerage and IRA accounts, and June 1, 2004 added $250,000 to your brokerage account. for a total of $859,500. In 2006 when you retired you rolled $79,750 into your IRA from your 401k and withdrew $150,000 from your brokerage account; in 2008 tax law dictated a distribution from your IRA of $15,000. So starting with $859,500, adding $70,750 and withdrawing $165,000 leaves $774,250 without regard to investment gain or loss. Then, after the cataclysmic 2008 stock market plunge which saw markets down 25% to 50% worldwide and in every investment sector, your 12-31-2008 portfolio at Schwab ended up at --- $867,000.

3. Number 2 ignores completely your $208,750 fixed annuity, $112,500 in CD’s and $50,000 annuity invested in the TIAA bond fund.

4. Because of your pensions and consulting income, you have not needed to use any investable assets to provide retirement income in the three years you’ve been retired.

The purpose for sharing this communication does NOT have anything at all to do with investment performance. Clients with longer investment time horizons and more aggressive asset allocations have had a worse short-term investment experience.

The point is that a long-term perspective with reference to specific individual goals and needs is the ONLY way to consider one's investments.

Exact financial figures have been altered, but the ratio between values reflects actual client figures. Other specific details have been omitted or modified to protect confidentiality. Data shown represents past performance. Past performance is no guarantee of future results; current and future performance will almost certainly be higher or lower than the performance shown.