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Many Americans haven’t fully recovered wealth that was lost during the bursting of the real estate bubble and the bear market that followed the subprime mortgage crisis, according to a recent report by the Federal Reserve.

The study concludes that Americans, on average, have recouped only 45% of their losses, which is somewhat surprising when considering that home prices have been increasing and equities have been generating strong returns during the past few years. Indeed, many broad equity indexes have recently set new record high levels, which illustrates that markets have fully recovered from lows reached during the Great Recession.

For advisors, the study is an attractive opportunity to reach out to clients and prospects to emphasize the merits of taking a long-term investment approach that includes exposure to equities and riding out market downturns. When meeting with clients, advisors can explain that Americans who held on to equities have had the most success with recouping losses. After all, equities, as measured by the Russell 3000 Index, have generated an impressive 23% annualized return from March of 2009 through Thursday, June 6.

More specifically, advisors, when meeting with clients, can make the following points:

• The disappointingly low 45% of lost wealth that has been recovered would have been substantially higher if more Americans didn’t panic and sell equities during the market downturn.

• Selling equities during the bear market and in recent years to avoid additional losses has proved to be counterproductive. By selling equities, investors locked in their losses and were unable to recoup losses that resulted from the bear market.

• Investors who rode out the market downturn are now well positioned to benefit from any potential gains in equities going forward.

• Investors who flocked to bonds have benefited from the Federal Reserve’s actions to maintain low interest rates. Nevertheless, bonds have substantially underperformed equities. In addition, with bonds offering exceptionally low yields, the securities are highly vulnerable to rising interest rates. Apple’s recent bond issuance illustrates that risk. The company issued $17 billion in debt in April. Its 10-year bonds with $1 million face values sold at $998,670 to entice investors. By late May, however, the bonds’ trading price dropped to $961,960, as investors anticipated that an improving economy could lead to higher interest rates and bid down prices. The decline represented a 3.7% loss. Apple’s 30-year bond prices, meanwhile, dropped 6.2%.

• Interest rates are being kept low by the Federal Reserve’s quantitative easing, which involves printing money to purchase $85 billion in bonds each month. As the economy strengthens, the Fed will eventually scale back and then terminate the program, which will probably result in interest rate increases and bond values declining further.

• The current low yield of bonds, after considering inflation, is miniscule and over the long term may not protect investors from the erosive impact of inflation.

• Over the long term, most investors will need to generate equity-like returns to reach their long-term savings goals.

Advisors, of course, should also use the report to emphasize the value of building diversified portfolios to manage risk. At the same time, advisors can offer to run financial projections based on savings rates and different model asset allocations to help clients and prospects assess the likelihood of reaching their long term goals.

The report, therefore, while being an attractive way to promote the appeal of equities, can also be a starting point for discussions on the merits of crafting a long-term financial plan that includes target asset allocations and disciplined savings that may involve making contributions to qualified retirement programs. In the process, advisors can demonstrate the value that they deliver by helping their clients maintain a long-term and disciplined approach to investing.

Last modified on Wednesday, 26 June 2013
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