During challenging times, it’s human nature to take action. Feeling the need to do something – anything – is in our genes when faced with obstacles or difficulties. And of course with difficulties come stress, which has all sorts of negative effects on our minds and bodies. Emotions come into play in these times, as it’s very difficult to think in a completely rational, logical way when under stress. We all know these things, but it’s important for us all to step back and ask ourselves if we are allowing emotion to dictate important decisions.
How a Financial Advisor Can Help During an Economic Downturn
One of the most important things a good financial advisor does for their clients is to help them remove emotions from financial decisions. When a person has worked for years to amass personal wealth, only to see it fluctuate wildly during extreme market volatility, it’s asking a lot to say “completely detach yourself from feeling any emotion about these events.” That’s why having a trusted advisor to help is so vital, especially during times like these.
We all hear about how fear and greed guide too many investors toward irrational financial decisions. When the stock market is skyrocketing, people fret about not being 100% invested in stocks. And during bear markets, folks wonder why they own any stocks at all. The quality of an advisor shouldn’t be judged based on prognostication – that doesn’t work. No one can see the future. A good financial advisor should be a counselor who helps you stay the course – even when it feels like you need to run for the hills.
When is the Right Time to Hire an Advisor?
So, when is the right time to hire a financial advisor? The reality is that there’s not really a wrong time — the sooner you can form a long-term plan that’s tailored to your goals, and ensure that your portfolio is designed to help you meet those goals, the better. Even though volatility and uncertainty in the market and the larger economy can be unsettling, accepting that we can’t predict the future doesn’t mean you shouldn’t have a solid plan. So, the right time to work with a fiduciary advisor (a financial advisor who’s legally obligated to act in your best interest) is usually…now! Just make sure you do your research when looking to hire an advisor or make a switch from your current advisor. Here are some questions to ask when you’re interviewing potential advisors.
One of the reasons it’s so important to start working with an advisor as soon as you can is that an appropriately diversified approach in your portfolio provides the highest realistic probability of achieving long-term goals. Individual investors can often fall into the trap of trying to time the market instead of sticking to a well-diversified plan with strategic rebalancing. This is one of the most important things we do for our clients. Timing the markets would be the best approach if anyone could do it. Unfortunately, it’s been endlessly proven to be impossible. Yet under circumstances like these, the notion of market timing rears its ugly ahead again. We need to constantly remind ourselves that timing does not work, and that no one has ever been able to consistently do it. No one knows what’s going to happen next. Anyone who says they do know is either dishonest or delusional.
Some may think “Why not sit in cash for a while, and then reinvest when the dust settles and things are better?” The answer is that no one knows when the dust has truly settled. If someone goes to cash during a market drop, they are essentially saying “I know what’s going to happen next, and I’m taking action based on that knowledge.”
The reality is that they do not know, and they are just trying to make themselves feel better by “doing something.” The investors who really got hurt during the 2007-09 financial crisis were the ones who went to cash at or near the bottom – and then had no idea when it was “safe” to get back invested. The truth of it is: there’s no way to tell when it’s safe. There is no all-clear siren. Therefore, working with an advisor to develop and stick to an appropriate long-term strategy, one that will mitigate some losses on the way down and will enjoy some of the gains when the next bull begins, is the smartest way to approach your portfolio.
Working with an Advisor During a Volatile Market
Diversification is the shield that protects us from at least some of the stock market’s unpredictable volatility, but at the same time we have to remember that accepting some volatility is the price of admission for the good long-term returns we enjoy by being invested in stocks. There is no free ride – no investment that provides very high reward with very low risk. The tradeoff between risk and reward is inescapable.
Another thing an advisor can help you with as an investor is ensuring that your portfolio appropriately matches your risk tolerance. As investors, we should always be considering what our true risk tolerance for investing actually is. The term “risk tolerance” does not refer to how an investor feels about the market this morning, with a change coming tomorrow as his/her mood shifts. Risk tolerance is the ability for an investor to withstand the long-term volatility that comes from a given investment strategy.
For example, an investor who is conservative is probably someone who does not handle volatility well, and therefore should be in a long-term strategy that experiences lower volatility. But that level of risk tolerance does not change because the investor likes or dislikes the current president, or because they feel a recession may be imminent. That’s market timing, and again: it just does not work. The key is to find the strategy that fits your need for growth and ability to handle risk so that you stick with the plan over time, as opposed to periodically switching gears based on intuition. A financial advisor can help you realistically assess your risk tolerance, and put you in a strategy that matches it while still giving you the growth you need to meet your goals. But keep in mind that no matter what the strategy is, every approach comes with some risk…even cash.
How to Focus on Your Goals Over the Long-Term
So, lastly, it’s especially important to work with an advisor who has your back during uncertain times in the market, because they can keep you grounded in your goals, your portfolio, and making sure you’re doing the right thing for you. It’s sometimes hard to tune out all the “noise” during times like these when countless “experts” appear on our TV screens telling us what the market is going to do next and what you should be buying or selling. Working with a good financial advisor will give you an objective person to call when you’re scared or not sure what to do. They can help you remember that market drops don’t mean “everyone” is exiting stocks. It feels like everyone is running away from stocks in terror, so we should as well. That’s another aspect of human nature: if the crowd is running from something, it feels like it’s probably best to follow the crowd. But we have to remember that the equity market is a zero-sum game. So when market prices drop, it’s not because everyone is bailing out. For every seller there is a buyer. The mechanism is not demonstrating an exodus from stocks – it’s demonstrating price discovery, just as it does every day. The market (buyers and sellers) are simply agreeing on lower prices as fair value, and this will inevitably fluctuate over time.
A crisis like what we’ve seen in the wake of the coronavirus naturally produces emotional responses. Anyone who has no fear right now is probably not acknowledging what’s really happening. But bravery is not the absence of fear – bravery is the measure of how we deal with our fear. And allowing emotions like fear to dictate our decisions will almost certainly lead to disaster. Relying on the expertise of a professional financial advisor, especially during difficult times, can help avoid bad decisions based on emotion.
Suggested Next Steps for You:
- Download our FREE guide to market volatility to learn about some common mistakes to avoid when the market gets choppy.
- Sign up for Personal Capital’s FREE financial tools, where you can track all of your accounts in one secure place, and take advantage of sophisticated planning tools like the Retirement Planner and Fee Analyzer.
- Work with one of Personal Capital’s fiduciary financial advisors. Once you’ve signed up for the free tools, you can schedule a free 30-minute portfolio review with an advisor from the comfort of your home. Learn more about our wealth management services here.