What the meltdown means to the retiree

The steep downturn in the markets has hit senior citizens the hardest. Many of them have seen the value of their portfolios plummet, at a time when they need their money the most.

An elderly widow I will call Mary is one victim. Her husband died a few years ago, leaving Mary, in her early eighties, with a nest egg sufficient to meet her needs for the rest of her life

Shortly after his death, her trusted "investment professional" invested most of her portfolio in two financial stocks. In less than two years, the portfolio lost over $150,000.

The news is not all bad. The brokerage firm made over $50,000 in commissions by excessively trading the balance of her portfolio.

Mary has now entered a nursing home. Her retirement funds are nearly gone. She risks becoming a ward of the state.

It is easy to blame the markets. They did fall in value. But that is precisely how markets are supposed to work. The foundation of all returns is risk. Markets go up and down, usually in cycles.

Mary's problem was the perfect storm of an inappropriately risky asset allocation and an incompetent or greedy broker. She could not afford any meaningful market risk. Her portfolio should have had an allocation of no more than 20% invested in a broadly diversified stock market index fund with the balance of 80% in a low cost index fund benchmarked to the Lehman Bros. Aggregate Bond Index.

There is plenty of blame to go around. Most of it should be focused on poor asset allocation and broker misconduct, not on the markets.

Read how the financial crisis is affecting other WalletPop bloggers.

Dan Solin is a Registered Investment Advisor and the author of The Smartest Investment Book You'll Ever Read (Perigee Books 2006) and The Smartest 401(k) Book You'll Ever Read (Perigee Books 2008).