If there's one staple of financial planning wisdom that virtually everyone will agree upon, it's stocks for the long run. Sure, we all acknowledge that markets can be volatile in the short term, but we all seem to still agree that in the long run, stocks are still where it's at. So as long as you have a long enough time horizon - whether you're a young person still accumulating, or a retiree looking at a multi-decade spending phase - stocks are still a material portion of the portfolio. But within the past hundred years alone, there was nearly an entire generation - who grew up during the Great Depression - that gave up on stocks for their entire lives. What if that happened again? Has the financial planning profession hitched itself to the stocks-for-the-long-run wagon so tightly that if stocks fall off a cliff, so too will the profession?
Today's blog post is a subject I have been giving a great deal of thought to lately. As a profession, we seem to have hitched ourselves to the stocks-for-the-long-run wagon. The implicit expectation that stocks MUST belong in a portfolio is so dominant, it's almost impossible to even think of a world where stocks aren't the central portfolio focus. But what if stocks had a real disaster? What if we went through a second Great Depression for real, and another generation flat out gave up on equities? What if the US has a Japan-style experience, where the stock market is below half of its former peak over two decades later? If the S&P 500 is still under 750 in 2020, where does the financial planning profession stand?
When I pose this kind of stock market scenario to planners, many dismiss it outright as being impossible, but surely it's not; similar market events, and worse, have happened in other countries throughout the world. It may not be probable, or even likely, but to deny it's possible seems ridiculous; after all, we didn't think it was possible for housing to experience a bubble and a national price decline, until it did.
Alternatively, many point out "but if you don't invest in stocks, clients can never achieve their goals!" To which I have to reply, "rubbish!" (Or substitute a stronger word of your choosing!) People have accumulated sufficient wealth to live a sustainable life and retirement without the tailwind of equities for a long time now. Most of the Great Depression generation did it, through hard work, a much thriftier lifestyle, and a strong and steady focus on saving (in bonds and CDs!). Could we do it without equities the way we save today? No, certainly not; we'd have to save a LOT more. But can enough wealth be accumulated to sustain a successful lifestyle; absolutely.
But then again, that's the point. Financial planning has built all of its investing and spending recommendations around the saving that would necessary if we get the long-term stock returns we expect. If markets aren't just volatile for a year or few, but instead a decade or few, clients are going to find themselves with dire shortfalls; they may have earned market returns, but if the market didn't return what they needed, the financial plan itself is still a catastrophe.
Of course, it doesn't have to be this way. Financial planners could take a strong stand on spending less and saving more. We could focus more of our value on helping clients navigate tax, employee benefits, mortgages, debt, and other financial issues, instead of necessarily being as investment-centric as we are. But the point isn't even about our investment-centric business models; it's about our stock-centric investment advice, and the presumption that all clients should have a significant exposure to equities to benefit from their long-term returns. And we assume that the disaster event will never really happen.
But what happens if that event occurs? What happens if we take clients into the stock markets and they really don't generate much of any return - or worse, outright lose a significant amount of money - over a time period as long as 20+ years? Will clients forsake the market? All of history points suggests the answer is "yes", an entire generation may walk away from equity investing. But if the equity bear market also destroys their financial planning goals, does that mean clients will walk away from financial planning, too?
It seems unlikely, improbable, and almost impossible. But are you willing to bet your practice and the future of the profession on it?