The traditional theory about how to build an investment portfolio is based on one simple but extremely troublesome premise, according to Myles Wealth Management principal Craig Myles.
"The premise is that the returns from the various investment sectors in which one invests are predictable - hopefully, over the timeframe in which one invests."
However, economics had not come to grips with dealing with extreme events, or the unexpected, he said.
The world was in the middle of one of those extreme economic events.
Although not necessarily unprecedented, it was certainly extreme.
"It is during these periods that we are inclined to reflect on the robustness of the processes we employ on our clients' behalf."
Traditional investment theory had been found badly wanting during periods where there were major investment market upheavals, Mr Myles said.
Many in the investment industry discounted those events as short-term phenomena, but experience suggested the periods of extremity occurred more often than most expected and often lasted longer than expected.
"Let me assure you that trying to encourage a 70-year-old retired couple to focus on the long term, while academically defensible, is a tough tale to tell, especially in the middle of a financial storm."
Traditional investment theory might be the correct starting point for institutions such as the New Zealand Superannuation fund which had a 50-year timeframe and no commitments to meet in the immediate future, he said.
"But it will not deliver the results that ordinary people generally seek with their retirement capital.
"Managing the wealth of the families we deal with requires a different starting point and a different process for managing their money than that used by big institutions and most financial advisers."
Having a 15-year to 20-year investment timeframe while markets went through suboptimal returns for 10 or 12 of those years was not going to help clients achieve their financial objectives.
Research conducted by Myles Wealth Management identified that clients tended to have a hierarchy of six main financial and lifestyle needs.
While clients could often talk generally about those needs, they never considered how much wealth would be required to meet each need.
The six areas of need were:
• Emergency needs - reserve funds that could be readily called upon in the event of an unexpected need for cash.
• Spending needs - funds that would be required to meet spending needs during the next couple of years.
• Maintaining lifestyle - medium-term spending requirements.
• Protecting wealth - a blend of defensive assets to anchor the portfolio over the longer term and create a buffer against short-term volatility.
• Growing wealth - aimed at growing the value of the pool by more than the rate of inflation over at least a 10-year timeframe.
• Creating wealth - pool of assets for those prepared to take on higher risks to grow their wealth at a faster rate.
Not every client would end up with all six of the categories, Mr Myles said.
"Every client will end up with a series of investment portfolios built specifically around their needs, not those of the investment managers or those defined by some esoteric investment theory."
Research had shown that investors did greatest harm to themselves if their investment strategies did not take account of their behavioural tendencies, he said.
Investors became concerned that movement in investment markets was unduly affecting their lifestyle objectives.
They could not see how their portfolio was structured to meet their needs.
"As a consequence, they tended to buy high and sell low, often incurring unnecessary capital losses."
Mr Myles issued a warning to investors piling into the corporate bond issues that were flooding the markets.
"Investors are buying the brand with the bonds. That doesn't mean to say they are the best buy. They are not rated by any credit-rating agency. While credit-rating agencies have let the market down in some cases, they are still the best measure of creditworthiness we have."
The wave of defaults in corporate bonds happened after the recovery started, not when an economy was going through a recession.
Figures supplied by Mr Myles showed that in past credit crunches the default rate of corporate bonds reached 15% once the recovery started.
There was no one factor that triggered the defaults.
Partly, the influx of money through the bonds hid problems that money would not solve.
It was just delaying the inevitable, he said.
