Not long ago, I asked a group of advisors who read my newsletter, Inside Information, this question: Given all the recent market turmoil, what future market returns are you planning for in your retirement projections-and why?

I was curious about the real (after-inflation) returns that advisors are plugging into their planning software and Monte Carlo simulations, as well as what led them to pick one estimate over another.

The collective (median and average) numbers were a bit surprising. But far more interesting was the way that advisors are thinking these days. Ten years ago, if asked a similar question, most advisors would've said that the historical returns over the last 40 or 70 years were x and that there was no good reason to think we could outwit history-so x was their number. The only main difference between one advisor and another would have been how far back they looked.

A NEW BENCHMARK

I received more than 400 pages of responses to my question and nobody, not one single advisor, invoked historical returns in the decision process. Some respondents were looking at a possible second dip to the recession, rising inflation rates, or the plausible assumption that consumers' inclination to save will halt our economic growth for years to come.

Others looked at the impact of high future tax rates on the U.S. economy; and still others said the drivers of economic growth have relocated to BRIC or developing nations. A few focused on the inflation rate, making different estimates for different components of client expenses (healthcare and college costs would go up much faster than oil and commodities, whose prices might rise faster than food and consumer staples, for instance). And more than a few are adjusting their optimizers, replacing the normal bell curve with leptokurtic distributions, Pareto-Levy or Cauchy-Lorenz curves.

Interestingly, all this fancy thinking tended to produce fairly similar return estimates: real returns in the 2.5% to 4% range for blended stock/bond portfolios. One advisor whimsically noted that, for newly cautious clients, 50/50 is the new 60/40.

The discussion reminded me of the early 1980s, when practitioners faced the almost impossible task of convincing their clients to buy stocks and mutual funds after the Dow had basically gone nowhere for 17 years. Those advisors knew a lot more about economics and valuations than many of today's planners; after all, they had to convince skittish clients that stocks were not just all risk and no gain.

We aren't there yet, but my poll suggests that we are approaching similar territory, a time when the last few investors finally capitulate and a new bull market can climb up out of a hole in the floor. One advisor compared 2009 to 1976-a year of great performance following a nasty downturn, which everyone took as a hopeful sign of long-term recovery. Then came the period from 1977 to 1981, a rough patch which squashed all hope of a recovery and brought us to those magical days in 1982, when stocks could be picked up out of the gutter at P/E ratios of seven, and nobody looked twice.

FROM THE NEXT DEBACLE...

If history does decide to repeat itself, meaning that we are indeed in for another negative few years, the types of advisors who rail against a fiduciary standard and switch broker-dealers every couple of years will be whispering in your clients' ears that they're suckers if they buy stocks.

Soon they'll be saying the same things about taxes-if they aren't already. And sure, given the recent deficits, higher tax rates in the future are possible. The marginal rate could reach punitive levels for prime planning clients, motivating them to look for investment opportunities that exploit some hidden corner of the tax code. In my poll, advisors reported some new clients coming in with odd illiquid partnerships in their portfolios, recommended by former "advisors" affiliated with small, newly formed B-Ds that none of us had ever heard of.

This could lead us to the next investment debacle-a blowup of illiquid, tricky, tax-favored investments and strategies sold (of course) by people calling themselves financial planners.

Mainstream planners are smart enough to avoid the next hot product, but they, too, are making adjustments. The profession is beginning to realize that hidden inside the long-term averages are periods-decades long, sometimes-that deliver the kinds of results that can decimate a retirement plan.

NEW IDEAS

But just as modern portfolio theory emerged from the ashes of the Black Monday meltdown, the Great Recession of 2008 might spur the development of new tools and strategies that address downside risk and help us figure out whether assets are overvalued or undervalued.