Anyone who's been to Disney World knows the term "imagineer." Walt Disney used the term to describe his employees, who designed and developed the theme parks we know today. But before Disney used the word, The Cullman Banner, a newspaper in Cullman, Ala., defined imagineering, a new post-WWII coinage, as a combination of imagination and engineering: "the fine art of deciding where we go from here."

As I think about the financial environment of the past months, I come back again to this term. As I write this column, the stock market has suffered its greatest loss since 1929. As far as I can tell, the subprime debacle propelled this nation into economic disaster and global recession. Investors are panicking, and advisors are trying to keep their clients from jumping ship. This will take a bit of imagineering on our part. In essence, we're helping clients design and build their futures from this point forward.

It's not all bad news. Advisors I spoke with in October reported losing few clients, many of whom were difficult to manage before this mess. They could probably have predicted who would leave them in this economic climate. Surely this is a test of how well we have prepared our clients for short-term volatility. Surely, many of us have passed this test. Better news comes from the CFP Board's Pulse survey conducted in October 2008: Two-thirds of respondents reported an increase in prospective clients.

What if This Lasts?

We may well be in the midst of a prolonged economic crisis, one not nearly as deep, we hope, as the Great Depression. In any case, what should we be doing now? How do we address the seriousness of today's economic situation in a meaningful way?

In our practice, when faced with volatile markets and economic downturns, we've always refocused the client on planning issues. "Yes, we know the market is fairly volatile right now," we say, "but let's look at your disability policy to ensure that you are well covered in the event of a personal disaster." After months of attempting to downplay market movements, this tactic won't work anymore. Clients who believe the world is coming to an end couldn't care less if we review their risk management.

This year, we have also been "stress-testing" our clients' portfolios, determining just how bad things would have to get before their plans were disrupted or destroyed. This tactic, too, served to calm fears for a while. But as time has passed, clients have decidedly "been there, done that," and need something—anything—to reassure them.

Investment Discipline

Our portfolios have reached our rebalancing parameters and we have been repositioning assets as dictated in our investment policy statements. Some advisors tell me that they have not done so and are waiting for "things to calm down." I worry that if you do not follow the investment policy you've documented, you may have some potential liability should the market make a dramatic gain before you rebalance. Without doubt, this financial environment has many top planners questioning their own investment philosophies and wondering whether there was anything to be done earlier to mitigate the current situation. Many told me they've wondered if they should have reacted to subtle signs and taken a more defensive stance earlier—which would not have been their characteristic behavior. Of course, in hindsight the pattern is much clearer than it is in real time.

My partner Harold has been telling our clients about two possibilities. "One," he says, "is that the world is coming to an end. After many more days of these losses, the S&P will be at zero and we can start all over. Of course, if it's the end of the world, there are no safe harbors and therefore no place to go. We believe the next few months to years will likely be volatile and scary; however, we do not believe it is the end of the world. In fact, we believe that the result of clearing out a backlog of financial nonsense and some chicanery will be the beginning of a much healthier future."

Explaining the Pain

The second possibility he suggests is full of pain and opportunity. "How much worse will it get?" Harold asks. "In spite of the talking heads on television, no one has a clue. Current market volatility has been disconnected from fundamentals. Two driving forces are panic selling and forced liquidation due to deleveraging. That simply means that many investors, particularly hedge funds, have to raise money to pay down loans to nervous lenders.