Financial Advisor Marketing & Technology

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Making Sense (And Dollars) After The Plunge

“If you go to a doctor because your elbow hurts, the doctor isn’t going to treat you heart or hand,” says Craig Israelsen. “He’ll treat your elbow. That’s what advisors need to do with clients now.”

“It’s not like a client’s entire portfolio is hurt,” says Israelsen. “It’s just part of it.”

Israelsen, an associate professor at Brigham Young University and frequent contributor to Financial Planning Magazine, likens the market crash of 2008 to a client’s elbow that's taken a very unfunny blow to the funny-bone.

Israelsen will speak about how the market cataclysm affects rebalancing at this Friday’s 4 p.m. EDT session of the Financial Crisis Webinar Series.

Israelsen says that advisors who did not have retiree or pre-retirees holding age-appropriate cash positions before the global economic crisis decimated stock prices are vulnerable but have no one but themselves to blame. He has always argued that it was misguided to think of cash as being a drag on portfolios. “No one thinks cash is a drag now!”

Prudent advisors did have retirees and clients over age 55 in a portfolio with a reasonable amount of cash. For retirees, this is the time to draw down on cash. And it is also a time to focus on the performance of their cash position, that is, to focus on what worked in 2008.

“They should be pulling their retirement income from their cash positions,” says Israelsen, who offers advisors a subscription to his research for $350 a year. “That’s what the cash is there for. It’s a pantry.”

“Leave the equity positions alone for now,” he says. “They will come back.”

In client communications right now, advisors should be focusing on the part of their portfolios that have been bullet-proof, says Israelsen, a 50-year old tri-athlete and father of seven. By focusing on what has been working, you make it easier for clients to sit tight and wait for stocks and stock mutual funds to rebound.

“The entire portfolio you manage for a client may show a negative return,” says Israelsen. “But you don’t need to liquidate the entire portfolio. You only need to be sure the client has money for living expenses now, and that is what the cash is for.” Cash is there for a rainy day, and it has been pouring.

Israelsen’s research has long focused on broad diversification. His 7Twelve portfolios use seven asset classes and invest in 12 underlying mutual funds or ETFs. The portfolio is designed to be used as a core position within virtually any portfolio.

While many advisors think of the Standard & Poor’s 500, or perhaps an ETF or fund investing in the total stock market, as their core portfolio position, Israelsen says the core position of a portfolio should be a widely diversified bundle of asset classes.

The core of Israelsen’s 7Twelve portfolio is comprised of equal-weighted positions including real estate, natural resources, commodities and bonds as well as of large-, small, and mid-cap stocks and several other asset classes, including cash.

Using the 7Twelve portfolio as the core holding in a balanced 60/40 portfolio makes sense. For example, a 60% position in the 7Twelve portfolio combined with a 40% position in the Vanguard Total Bond Index lost 12.8% in 2008, but had a 6.6% 10-year annualized return between 1999 and 2008. Alternatively, a 60% position in the Vanguard Total Stock Index combined with a 40% position in the Vanguard Total Bond Index lost 20.2% in 2008 and had a 2.4% 10-year annualized return as of 12/31/08.

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