MELVILLE, N.Y. – What a difference a year makes. A year ago Thursday, the Dow Jones industrial average reached its highest level ever, 14,165 points.

But after a spate of high-Richter financial earthquakes that include the current credit crunch and the need for a $700 billion government rescue package, the Dow, not surprisingly, is setting records in the opposite direction.

Monday it closed below 10,000 for the first time in four years, at 9,956, down 370 points. Tuesday it continued that slide, closing at 9,447, down 508 points, then dropped another 189 points on Wednesday to close at 9,258. All told, the index has tumbled more than 30 percent from last year’s all-time high.

The Dow’s dramatic drop and the economy’s spectacular downturn were hard to call, some experts said, because, unlike the tech bust that was limited to extraordinary risk-taking in one sector, the downturn involves several areas: the mortgage industry, credit markets, banking and stock market. And some financial planners believe this market more than ever demands that people rely on a balanced portfolio to weather the storm.

But risk-taking drove the Dow to its record highs.

“Everybody was looking for returns,” said Jay Dahya, associate professor of finance at Baruch College in Manhattan. “If you are looking for returns, you are willing to take the risk without really understanding it.”

He said the current economic debacle was so hard to call that most economists last year were predicting the U.S. would skirt a recession because of a booming export business fueled by the dollar’s fall against other currencies, which made American products cheaper overseas.

“Ninety percent of the experts were wrong,” he said.

Raphael Soifer, who now runs his own consulting business and worked for the Manhattan investment bank Brown Brothers Harriman, said he didn’t foresee the magnitude of the problems in banking and the credit markets, but some signs late last year pointed to a shaky economy for 2008.

The mortgage industry was weak and interest rates that banks charged each other for loans were rising, he said. A higher rate indicates banks are skittish about lending.

“I was reasonably nervous,” he said. “There were bad signs.”

And he said, a Harvard MBA index he devised in 2000 signaled an overheated economy in 2007. If 30 percent or more of a Harvard Business School graduating class is hired by Wall Street, that is a sign that the securities firms are “laying out big bucks,” an indication that the market may be near its peak, he said.

The class of 2007 set an all-time record of 40 percent, he said.

The altered economic landscape has changed what clients are demanding of financial advisers and what the advisers counsel.

Ellen Douglas, a financial planner in Roslyn, N.Y., said that a year ago she had to talk some clients out of buying full tilt into the rising stock market, despite her advice to build a balanced portfolio of stocks, bonds and other investments.

“I had to remind them of the tech explosion and that the biggest hogs get slaughtered,” she said.

Despite the drop in the market, she tells people who are 10 or more years away from retirement to take advantage of the cheaper stock-buying opportunities right now. For those five or fewer years away from retirement, her message is different,

“Sit by the wayside, and invest in bonds,” she said.


Roy Williams, a founding partner and chief executive of Prestige Wealth Management Group, a Pennington, N.J., firm that advises high-net worth clients, said he also advocates a balanced portfolio.

Last year when the Dow was rising, he advised clients that it was still important to have the right allocation of stocks to bonds.

“History shows that you cannot time the markets,” he said. “What’s important is that you have the appropriate allocation.”

He believes it’s important for clients to remain in the market, but they should have at least two years’ worth of liquid funds in cash or short-term CDs to help them ride out the current volatility.

“If not, they can be forced to sell assets at a discount price,” he said.