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I've been having the same discussion lately with a variety of advisors, and sometimes the conversation gets heated. So I'd like to lay out my position here for all to see, and maybe this will start a useful dialogue.
The discussion usually starts when I am approached by an advisor who jumped out of the market sometime before November, and in some cases before September of last year--and when I mean "jumped," I mean took client equity positions down to 20% or less. These advisors are still sitting on losses, but they aren't nearly as significant as what most of us are looking at in our retirement portfolios. And now, when I ask them how they're doing, they immediately, sometimes eagerly, tell me that they paid attention to the economic signals and avoided most of the wreckage, and how (they ask me) can other advisors call themselves financial planners when they were too ignorant to see this train wreck coming?
This always starts the argument. On my side, I point out that a few others missed these obvious signals too--people like Hank Paulsen and Ben Bernanke and Warren Buffett and, oh, maybe a few hundred million others, and on their side they say that most financial planners are brainwashed zombies who would buy and hold even if we declared nuclear war on China, and that advisors, if they are REAL advisors, need to pay more attention to the economy and valuations and everything else so they can protect their clients.
Inevitably, I agree that, yes, more investment sophistication is needed. But I also ask them when the upturn will begin, and I have yet to get a consistent answer.
My sense is that there is some truth to what these people are saying. The financial planning community has been gliding on a kind of investment auto-pilot for way too long, and that planners of the future will either delegate their investment management activities, either through actively-managed mutual funds that have a broad mandate to shift their allocations if they think valuations are out of whack, or to some of these financial advisors who live and breathe market and economic statistics and who incorporate valuation measures into modern portfolio theory. (Is the market safer with a PE of 8 than it is when PEs are running into the 30s? If you answer 'yes,' then you should probably be paying attention to these valuations and structuring client portfolios accordingly--though, frankly, I still have no idea what the precise recommendations should be.)
I also, however, think that this is not exactly a perfect time to be switching investment philosophies. Even if you are a convert to what these sage or lucky advisors are now preaching, does that mean you should switch allocations to something more conservative now, when valuations are low?
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