To date, the S&P 500 index of large-cap stocks has lost more than 40% since November 2007, and about $2 trillion in value has disappeared from investors' 401(k)s and IRAs, (according to the Center for Retirement Research). There have been four other occasions since 1926 when the market has fallen at least 40% (most recently from 2000 to 2002), however, I understand that in the midst of this economic climate, it’s extremely difficult for the individual investor to take a long-term approach to her investment portfolio, much less care about a historical perspective.
More than ever, qualified, professional objective advice may be the key to consumer sanity. I’ve found that the most difficult thing for an investor to do in a market like this is to sit tight and weather the storm. The knee-jerk reaction is to get out of the market, which may be the most damaging thing a person can do.
There are many, many options for an investor that fall somewhere between “all out” or “all in”, and that may take into account any modifications to investment holdings, asset classes, diversification and rebalancing—which I am told sounds like a lot of mumbo-jumbo if you’re not a finance geek. Therefore, you may need some sort of professional finance geek to assess your situation and help you make the right decision.
I have issues choosing a person to cut my hair; I can’t imagine choosing a professional for something as convoluted as investing (if I weren’t already a finance geek myself!). So, as you search for that perfect financial planner to guide your portfolio to short-term prudence and long-term growth, consider the following factors:
Never settle for being treated like anything less than a three-dimensional person. If you’re going to trust someone with your money, you need to feel confident that person understands everything about you, from your current situation to your long-term goals. If you don’t think you could relax and have a conversation with this person and actually understand everything s/he has to say, then that advisor probably isn’t the best choice for you.
Incentives matter. Nearly everyone I have met in the financial services industry believes they are a very ethical person. Now, I’m not saying there AREN’T very good, ethical advisors out there, and I believe that it’s okay for people to make money. However, the consumer must always be cognizant of the fact that, as long as money changes hands, advisors have incentives to earn money from your wealth. Stay vigilant, always question those incentives, understand HOW your advisor gets paid, and monitor your investment fees.
Understand your investment strategy. Regardless of whether a financial planner recommends a strategy or you decide to come up with one on your own, err on the side of simplistic. There is a strong relationship between a sophisticated investment strategy and low returns. When it comes to investing, the KISS principle (keep it simple stupid) really works. And, if you can’t understand what your financial advisor is recommending, it’s probably too complicated.
Never completely trust anyone with your money. This is a corollary to understanding the strategy. Keep your advisor on her toes and keep asking questions. Trust any advisor enough to listen, but never to follow blindly. It's a recipe for disaster.
If an investment looks too good to be true, it probably is. Beware of promises of high returns without risk. One of my favorite advisor “tricks” is the review of Morningstar reports in conjunction with a portfolio. Morningstar is great when you understand how it works. Morningstar rates funds on historical performance . . . so there is always a chance that you have a portfolio of 5-star funds that completely tanks (because historical performance doesn’t guarantee future returns) or, you bought at a high point and the fund may have a positive return, for the year, but you personal holding period return is negative. So, Morningstar might give you great information that is completely unrepresentative of your investment.
Financial advisors are not all above average, so beware of the advisor who starts quoting their personal asset management rates of returns—meaning, what they say they have done for their clients’ portfolios in prior years. In a market that is almost completely "professionally invested," I have yet to meet anyone who considered themselves a “below average” money manager. It's easy for them to claim they are beating the market if they don't have to show their actual results (see Morningstar example above).
Ignore the experts. How many of those TV gurus actually predicted the 2008 market plunge? They were all wrong, wrong, wrong, yet still we watch them. Investing success is all about seeing the big picture despite the market's noise. Daily financial media, on the other hand, are all about creating noise. It's their job to treat every blip in the Dow as if it had deep meaning, despite reams of research showing daily stock moves are random or, at best, ambiguous.
Above all, find someone you can trust to be your sounding board. This person should be a level-headed, non-judgmental person who you can count on to give you a reality check when you feel yourself succumbing to investment panic. This person doesn’t need to be a financial planner; s/he might be your mentor, your mom, your coworker . . . whoever you know you can rely on to help you keep a level head when you feel like yours is about to explode.
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