2. Suck up the loss, sell the portfolio holdings, and move to more conservative assets. When things calm down, you have no chance of recovering that money, however, because certificates of deposits and Treasury bills cannot keep pace with equity ownership over the long-run. It may be three months, it may be five years, but you will have to watch the value of stocks skyrocket as your account stays at the lower, permanent level you forced it into as a result of your asset sales. For some people, this is still the right call due to their emotional disposition and financial position. (If this were my aunt or grandmother asking, to sell out now - and park the money in accounts paying only 0.01% interest - especially when the United States is printing dollars to try to stave off the credit crisis (which will eventually lead to inflation) seems idiotic to me, but honestly if they need the money to live on, you don't have a choice.)
I'm not a lawyer. What I can say is that based on my own opinion and the information you gave me, your parents would be wrong for claiming that the broker was at fault on a layman's common-sense test. Could you get a settlement? I don't know - maybe? But it seems like a fairly immoral thing to do given that you were willing to take all of the upside of the market yet when the inevitable volatility happens, want to lay blame off on a third party. It's not like the broker was having them write naked puts or something (which would almost certainly be irresponsible for the situation you described).
My response, however, is predicated on your statement that they own high quality Dow Jones type stocks. If they are well-off, can live comfortably on their social security checks, and have a long history of investing in the stock market, all equity exposure could have been a perfectly reasonable and rational portfolio allocation. Stocks are not like a savings account. You can't tell "how you're doing" by looking at the statement each month. Instead, you take a 3-5 year rolling basis and, frankly, we are just now at the 2004 stock levels meaning that your family is just as well off now as they were a few years ago, plus they have the benefits of reinvested dividends so it's highly likely that they are better off than if the money had been parked in a savings account. After all - what would have happened if your parents had sold out during the crash just before the original Gulf War in the 1990's? Or the 1987 stock market crash? They'd be much, much poorer than they are today. You're effectively suggesting they do the same thing now.
Take it for what it's worth.
