I had an interesting discussion with an advisor friend of mine the other day about client portfolios. He was of the opinion that a client (or anyone else) who doesn't sell while the market is down--like, say, now--hasn't really lost anything. "They still own their shares in companies, which for the most part are viable businesses; they still own their corporate bonds backed by similar companies, which are still paying dividends. So unless they have to sell today, what have they lost? If they stick it out, and let the market come back, they'll have felt no effect at all."
Then, of course, he went on to use the standard example: "What's the value of your house? Has it gone down? Has that changed your life in anyway?" I had to admit that my house would probably fetch less on the market than it would have, say, a year or two ago, and that this drop in value hadn't tangibly affected my life in any way that I could see.
Yet. But that's not to say that I'm not affected at all. Should the financial business continue on its downward trend for some time, I can foresee having to sell my house to lower my monthly expenses. Also, the portion of my retirement that I was expecting to cover out of recouping my substantial down payment and the increased value of my house has likely declined as well. So I have indeed been affected: My present circumstances and my financial future are both far less certain than they were a few years ago. I am, in a word, living with more risk.
What's more, this "risk" that many people are feeling these days goes far beyond our homes. Financial planners across the country have been spending a good bit of their time in the past few months recalculating their clients' retirement projections. Yet the parameters for those equations are probably more uncertain today than at any time in the past 30 years: How quickly will the markets recover? How will the depressed economy affect future payments into clients' portfolios? Or are costs expected to be covered by other sources? And how much economic slowdown will result from the seemingly inevitable higher taxes and rising interest rates driven by an exploding Federal deficit?
All this adds up to one question: What are the odds that in the foreseeable economic environment most folks will be able to "just not sell" until their portfolios outgrow their "paper losses"?
In my view, the sit-tight-and-everything-will-be-alright mantra has less credibility today than any time in recent memory.