Volatile markets teach lessons about investing

Whether they like it or not, advisers have become well-versed in financial manias, panics and bubbles. In the past year, housing values have dropped, the subprime mortgage market has collapsed, and the auction-rate-securities market has failed, ravaging portfolios and leaving advisers to explain the carnage to bewildered clients. Several advisers who attended the Investment Management Consultants Association's 2008 Spring Development Conference, held in New Orleans last week, explained what the investment management world has learned from these difficulties. Howard A. Johnson Principal Johnson Scannell & Associates Bellevue, Wash. Assets under management: $250 million "Our lesson from the housing collapse would be to have discipline to say that it is a bubble, and I am not going to invest in it. We all need to learn to recognize and react to bubbles. We always have a different bubble, and we always get caught up in it. In the technology bubble of the late 1990s, we had smart guys who still managed to lose tons of money in technology." Nate J. Wenner Financial planner and investment consultant Wipfli Hewins Investment Advisors LLC, Minneapolis Assets under management: $2.5 billion "Looking at the freezing of auction rate securities demonstrates that an adviser needs to act in the best interests of clients. They are not always told the risks in the strategies, and the devil is in the details. The industry hasn't always taken care of clients, and the auction-rate-securities breakdown is just one example. There are many other examples where certain firms are speaking out of both sides of their mouths." Dan Jozefov Director of investments Civil Service Employees Insurance Co. Inc., San Francisco Assets under management: $250 million "The investment industry made a mistake by looking in the rearview mirror and front-view mirror, but neglected to look at the side-view mirror. We failed because the investment banks have problems in other areas. You need to focus on the structure of the market. No one focuses on the effect that those institutions have. The issue of auction rate securities hinges more on the issuer and on the underlying support from the market maker. The issuers never disclosed that if they were to pull out, then the auction-rate-securities market would collapse. It is going to come out that the issuers created the [problems caused by the] auction-rate-securities market. They blew out the structure, and they left investors out in the cold." Paul D. Reasoner President Compass Wealth Advisers LLC Elkhart, Ind. Assets under management: $190 million "Never underestimate the greed of Wall Street and of the investment bankers. Somebody won on the auction-rate-securities transactions. There were a tremendous amount of fees generated at the mortgage level, and at the investment product level, and very little was done for increasing a client's net worth." E-mail Aaron Siegel at asiegel@investmentnews.com.