Apply time-tested standards to your investments

Bill Beeler, Correspondent

Here we are, 15 months into a serious economic recession and to some, it seems worse now than ever.

The stock market peaked in November 2007 and has been in a slide since. What seemed to start as a classic bursting of a housing bubble problem morphed into a full blown financial crisis. The Federal Reserve responded quickly and aggressively. Hope looked like it was on the way with the presidential election in November. The president-elect brought the promise of change and aggressive policy to tackle the economic crisis. So far, he made good on one campaign promise, signing the largest single spending program in our nation's history within the first month of taking office.

Can the U.S. and global stock market's poor performance be used as a predictor of how the economy will perform in the near future? If so, it appears the stock markets are not impressed with the actions of our policymakers. Likewise, the markets do not seem to be predicting a turnaround in the economy anytime soon. Are the problems more serious than we understand? Could it be investors just want to see some sign of the economy turning around before they commit serious money?

We must remind ourselves, we do not know if the stock markets are correctly predicting the future. The government and private industry may be doing everything right but the markets are just not moving back up. Stock traders sometimes call this the bottoming process. The bottoming process is a painful exercise of watching stocks go up and down, bouncing around market lows for months. Then, if history repeats, almost without explanation the markets rebound and push ahead. From a financial perspective, this has been a period when people have had their confidence shaken to the core. Most are nervous about their employment situation, investments, credit standing and even the viability of institutions with which they do business. What should an investor do? How can an investor position his or her assets to benefit from an economic recovery?

If we looked to what worked in 2008, we will go against almost every professional investor's recommendation of diversification. To preserve your capital, you would have had 100 percent of your money in U.S. treasuries. To profit, you would have shorted stocks (or bet against a rising stock). This investment philosophy may have worked well last year but this philosophy has not worked well in all market conditions.

We are constantly asked by our clients whether it is time to rethink key tenets of what, at least until now, had been deemed to be generally accepted investment principles. Modern portfolio theory, diversification and dollar cost averaging have done so little to protect investors from financial calamity in this crisis, and some are questioning the continued relevance of these concepts.

A skilled and ethical professional's value - or your own value, if you are managing your own investments - is to replace chaos with success. Generally, fee-only advisers accept the responsibility of acting as a fiduciary. Simply speaking, a fiduciary must act in the best interest of the client and make every effort to eliminate and disclose all conflicts. Obviously "selling" a product for a commission would not classify as a fiduciary act.

Blaine Aikin, president and chief executive of Fiduciary360 LP in Sewickley, Pa., says, "Under the laws that govern fiduciary conduct, there is an obligation to diversify portfolios and apply generally accepted investment principles, except in those rare circumstances when it is clearly prudent not to do so. Again, in 2008, about the only way to have averted losses would have been to either sell all investment positions and park the money in cash or take short positions in just about every available asset class. I don't know of anyone who claims to have had such keen forecasting skills actually to have done this. Moreover, an adviser who places such big tactical bets will be wrong far more often than he or she is right. Each correct call may win temporary respect and admiration from clients and colleagues. Each failure is an open invitation to a lawsuit."

Typically, people turn to professionals to be reassured that order can be restored to their world and that the adviser can help accomplish that. They want to hear a specific plan in familiar terms, preferably using tried and true methods. Think about this in terms of medical treatment. When I go to my doctor, I know most of what he is going to say: Exercise, eat right, get plenty of rest and return for regular checkups. If I am sick, I also expect to get a prescription to treat the cause or manage the symptoms. What I don't expect, and what I pray won't happen, is to find myself in a conversation about experimental new treatments that may save my life in what appears to be a hopeless situation. If ever I get that dire message from my doctor, it better be accurate, because what is good for me over the long term no longer has much relevance, including my relationship with that doctor.

With these caveats in mind, I recommend that every investor try to combat the debilitating effects of economic and market uncertainty by applying a reliable fiduciary standard of conduct when managing assets. If you are attracted to a "this time is different sales pitch," watch out. When an investor asks us what to expect in 2009, our objective is to display professional competence in applying best practices in investment management, utmost good faith in disclosing material information, avoidance of conflicts of interest, and a commitment to placing the client's best interests first.

We feel this is what clients want, what regulators demand, and what true professionals in our field should be prepared to deliver. If you are managing your own money, try to apply the same standard to your actions.

Bill Beeler, a Redlands resident for more than 20 years, is a investment adviser with Regal Wealth Group, an SEC-registered investment adviser with offices in Redlands and Seal Beach. Contact him at billb@regalwealthgroup.com