Housing’s continuing crisis

Financial planners and investment advisers are likely to have a hard time calming their clients over the next few months as the mortgage crisis continues to roil the financial markets.

They will have to draw on all their training and all their experience to determine the best course for each client, and on their powers of persuasion to win client acceptance of that course.

The crisis already has lasted longer than most experts initially predicted, and it has resisted the best efforts of the Federal Reserve Board and the Department of the Treasury to end it. Most observers see no quick end, and many expect it to continue into 2010.

That means the stock market is unlikely to recover any time soon and may well continue to slide.

Already, many investors have run out of patience and have cut their stock holdings. Others no doubt will surrender to concerns about the direction of the market over the coming months and reduce their stock positions.

Typically in a downturn, advisers would encourage clients to stick to their long-term investment strategy. If that called for a high equity position, the advice would be to stick to it. Only a minority of investment advisers believe they can successfully time the stock market.

But with the market down more than 20% from its peak and still sliding, many clients are likely to run out of patience and will want to get out of the market in coming weeks and months.

Unfortunately, there is little advisers can say to comfort such clients and encourage them to stay with their long-term strategies.

The stock market is unlikely to recover until there are hints of improvement in the housing crisis. At present, those hints are absent. In fact, the signs may be pointing in the other direction.

While home sales have edged up, the inventory of unsold homes has increased, according to figures released last week. This suggests house prices will continue to decline, meaning more write-offs for Fannie Mae of Washington, Freddie Mac of McLean, Va., and the commercial and investment banks.

That, in turn, means no easing of the credit crunch, as lenders husband their resources and attempt to rebuild their balance sheets by charging higher interest rates for what little they are prepared to lend.

Higher interest rates for corporate borrowing and for mortgages likely will prolong the weakness in the economy, creating continued uncertainty about consumer spending, reducing corporate earnings and reinforcing the weakness of the stock market.

Professional financial planners and investment advisers will have been communicating with their clients continuously as the bear market has proceeded.

No doubt many wealthy clients can afford to wait for the market to bottom, though they may not be happy doing so. The task for advisers is to prevent such clients from selling out near the bottom and locking in their current losses.

Other clients who are not so wealthy are in a more difficult position, and so too are their advisers. For example, many baby boomers who have only 401(k) plans to finance their retirement are approaching retirement age, and they are vulnerable.

In a little over two years’ time, the first of them will have to begin tapping into their retirement portfolios to supplement their Social Security benefits and any other savings they may have, unless they can delay retirement.

They may not even be able to trade down and take equity from the houses they may have relied upon to supplement their retirement incomes.

This is where financial planners and investment advisers earn their keep, where all their training and experience pays off — helping clients make the correct long-term investment decisions in difficult times.