Questions to Ask Your Advisor in Volatile Times
Have you heard this one? If you have $1 and it declines in value to 50 cents, you have experienced a 50 percent decline. However, due to your reduced asset base, you need a 100 percent return to get your $1 back. A 50 percent decline requires a 100 percent return to achieve zero.
This is what happened to millions of investors when the stock market declined 45 percent in 2008. They spent several years winning back their losses. Some have still not recovered. So far, 2016 is shaping up to be another risky year for investors. January was the worst performance month in the history of the stock market. And the uncertainty that is fueled by a volatile Chinese economy and dropping oil prices is not going away anytime soon.
Now is the time to make sure you and your financial advisor are communicating clearly. Many relationships were ruined in 2008 by a lack of preparation and discussion. Your primary concern should not be the advisor’s market outlook. Instead, you should be looking at information that you can measure. Here are five key areas of discussion for times like this.
What expectations did your advisor create for 2015? How did he or she perform relative to those expectations? The critical point here: Can you trust the expectations created by your advisor? No doubt, you have expectations for 2016. Are they reasonable? What is the strategy for achieving them?
During volatile periods you should be asking your advisor for month-to-month performance data. Bad months become bad quarters and bad quarters become bad years. Look at the data together and focus on identifying trends.
Your exposure to risk is driven by your asset allocation. What percentage of your assets is invested in the stock market? Are your investments more conservative (blue chips, value, large capitalization) or more aggressive (growth, small capitalization, emerging markets)? A popular strategy during volatile markets is to reduce allocations to stocks and increase allocations to money market instruments and short-term bonds. This is sometimes referred to as market timing. What is your advisor doing to reduce your risk exposure?
Many investors pay little or no attention to expenses when their investments are doing well. That changes during flat and down markets. Most pay a lot of attention to expenses that make it difficult to achieve positive rates of return. Your advisor should be willing to document every penny of expense that is deducted from your accounts, and be able to describe the value you receive for each dollar of expense.
Will you hold your advisor accountable for any losses that occur in 2016? Is it his job to avoid or minimize losses? Or is it his job to keep you fully invested during volatile markets so you are 100 percent in when the markets begin to rally? There are arguments for each approach, but what’s important is making sure you are both on the same page. You should have a written policy that describes your advisor’s accountability for your results so there are no misunderstandings and you have a record. It’s also one of the best ways to make sure your relationship survives the ups and downs of investing during challenging times.
Jack Waymire is the founder ofPaladin Research & Registry, a leading provider of information services to investors who rely on financial advisors.