As an advisor pre/post- the 2008 financial crisis and throughout subsequent periods of market volatility (such as 1994, wars, terrorist events, Brexit, you name it), when working with a new client I am regularly surprised by how often they do not have a handle on what is in their portfolio and/or purposes of an asset allocation or lack thereof.
During periods like the one we are in now, we watch television pundits that depending on the channel/time of day, are either predicting total market chaos, or a continuation of an extended bull market. Inevitably, it can create a lot of stress and confusion for an investor (and some financial advisors). In the end, investing should have the intended goal of creating “peace of mind” that a person(s) is on track so that they can breathe easier® (shameless plug), feel okay when they turn on the news and can live their lives the way they want to.
Knowing What You Own and Why You Own It – is always valuable because if the strategy is well thought out, and aligns with your time horizon and goals, it will go a long way to helping reduce stress and to gain the benefits of strategies working for you, versus against you. Capital One, the credit card company, has a good tagline, “What’s in your wallet?” I wonder, do you know what is in your portfolio and it’s purpose?
Once in a while a new client will say something like: “Hey Mark, I don’t intend to operate on my own brain or change my own oil, that’s what I have you for and I’m not interested in knowing all the intricacies of my portfolio.” I view this as a compliment and appreciate the fact they trust my judgement, I truly do. Many times however, the clients that are resistant to education are commonly the most stressed and operate more from emotions versus staying the course. Having an understanding of how different allocations and strategies can weather different market cycles is an important step. This is why clients do so much better while working with a financial advisor as opposed to doing it on their own. Some studies suggest a relationship with a financial advisor can boost returns as much as 3%. (Study 1, 2)
What’s a Bad Financial Product?
I feel the regulators have done an excellent job protecting the consumer, for the most part. As an advisor, it is true, I spend a lot of time speaking with clients about what not to buy (too many to list here). The ideas my clients are presented with are endless. When looking at investment vehicles, I am often asked if XYZ product is bad, or if they have read or heard somewhere to stay away from “X”. In my experience, the real issue is often that problems typically arise when XYZ product does not match the goal or time horizon, thereby defeating what the strategy and product was designed to accomplish. The strategy could be inflexible for long periods of time, creating extra costs to unwind (fees, taxes, etc.).
Tying this all together and understanding that even a little knowledge base is a good investment in yourself. It is important to collaborate with your advisor to get the results you deserve and reduce stress for when and if the next investment winter arrives because we know history has a way of repeating itself.