When bull markets rage on it seems as if everyone is excited and happy about the market. In a down market, it is amazing how quickly that sunshine turns to doom and gloom and how much panic it causes. At the time of the writing of this article, the S&P 500 has dropped 6% year-to-date, and I have had numerous discussions with friends and family about how they are feeling and what I would suggest they do. I usually begin by explaining that it really depends on what their goals and objectives are, along with many other factors, so I speak in general terms about investments and the importance of having a financial plan, and more importantly, the value of having a financial adviser on your team.
It Starts With a Plan
When we begin with the end in mind, whether it is somewhere to travel to or a goal to achieve, we are much more likely to get where we want to go with a plan. Proper planning allows us to be proactive in dealing with times of stress, as opposed to being reactive when things go sideways and making irrational, emotion-based decisions.
Planning allows the investor to know that they will be able to meet their long-term goals regardless of what the market is doing, because they are well diversified, invest for the long term, and make small adjustments to their investments. Their adviser is educating them on market conditions, and helps to make minor adjustments to their portfolio to take advantage of market volatility.
Weathering the Storm
The stock market is volatile and along with the ups, there are also downs along the way. The level of the ups and downs are magnified by the level of risk you are exposed to in your investment portfolio. Some investors are naturally wired to be more sensitive to value fluctuations in their portfolio, while others seem to be immune.
If investors who are sensitive to risk (risk averse) are invested too aggressively, they are more likely to panic and pull out of the market when a downturn happens. Doing this locks in their losses and will make them hesitant to invest in the future. If their portfolio is constructed to align with their tolerance for risk, it will be easier for them to ride the roller coaster and stay invested. A financial adviser fills a critical role in helping to align the investor with investments that fall in line with their risk tolerance, while helping them achieve their long-term financial goals.
When the market looks gloomy I get a lot of questions about buying physical gold, losing entire portfolios, and other doomsday scenarios. If you watch the news or cable television, it is easy to understand why these things come up. Fear-mongering commercials about buying gold seem to lead the charge on this front. They aim to cause fear (one of the strongest emotions) in order to sell you gold when the price of gold is likely at or nearing highs!
Losing an entire portfolio is a more realistic situation if all your investments are in a single company’s stock. If you have a well-diversified portfolio across multiple asset classes and buy good, profitable companies with strong balance sheets and cash flows, then your portfolio would only go to zero if all of those companies failed. In that scenario, we are talking about a failed economy and nation, and thus have bigger problems on our hands at that point. I see this scenario as irrational and highly unlikely. You are much more likely to come out ahead if you avoid the intake of fear and negativity, and stick with a long term financial plan.
The Value of a Trusted Financial Adviser
The list goes on about how we can get in our own way when it come to personal finance and investing, especially with all the strategies and products on the market. What matters most is that you find someone you trust who will help you devise and implement a solid plan, be willing to educate you on recommendations and ways forward, and will communicate with you frequently to provide portfolio updates and adjustments to your plan if necessary.
This point is highlighted in “The National Study of Millionaires” (2018), conducted by Ramsey Solutions, which interviewed over 10,000 millionaires and revealed that 94% of millionaires work with a financial advisor to achieve their money goals. There have been other studies published as well, including one from Vanguard Research titled “Putting a value on your value: Quantifying Vanguard Advisor’s Alpha” (2019), that found just the behavioral coaching alone that an adviser brings to the table can net clients a 1%-2% return.
In order to retire with dignity, it is important to have a financial plan to give you the roadmap to your retirement destination. Investing plays a big role in helping you get there, but understanding market volatility and what it means is perhaps more important, to ensure you stay the course. A true investor has an understanding of how markets work and does not make rash portfolio decisions based on fads, news cycles, or “the next big thing”—that is left to the speculators, i.e., gamblers, and usually results in sub-par returns, or even disaster. So while it might be fun to talk about the next big stock, or nerve-wracking to watch the market sell-off, the investor with a solid financial plan and a trusted adviser on their team is less likely to be shaken. If you have questions about the markets or need your financial plan looked at, contact The Financial Guys by going to our contact page and filling out a form. We are always here to help you.