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During these extraordinary times, investors have been inundated with media headlines that may have prompted them to question how their portfolio is positioned. Should they buy tech stocks, or sell them? Move their money to cash, or stay invested by focusing on the ‘long-term?’ Historically, the stock market has rewarded disciplined investors. But it has also stirred up more emotions and led to more poor decisions than a high school romance. Speaking with your financial professional could provide you with the perspective you need to make wise financial decisions, and gaining perspective requires effective communication.
Financial advisors should be reaching out to their clients throughout the COVID-19 pandemic to let them know they are available to answer their client questions, address their client concerns and help them make decisions that will align with their individual goals during these uncertain times.
But what questions could you ask your financial advisor to help you navigate these extraordinary times? We have compiled six key questions to ask:
1) How often are my investments being rebalanced?
Rebalancing is the systematic process of selling appreciated securities that are overweight relative to a target position, and then buying underweighted positions. During the recent significant economic downturn, stock prices declined and their weight within a balanced portfolio dropped. This was an opportunity to sell bonds and buy stocks at low prices.
2) What if my primary source of cash is the growth of my portfolio? How should I manage my cash needs?
Having a basic understanding of stock market volatility, the role of bonds in a portfolio and determining an appropriate cash reserve may help you remain calm during extended economic downturns. Your cash reserves should be your primary resource for paying short-term living expenses. The appropriate level of cash reserves varies from person to person. It depends on their individual circumstances and views on risk. We typically see anywhere from 3-18 months of living expenses held in cash. In addition to cash reserves, it is important to know how much income your portfolio generates in the form of dividends and interest, as well as access to other assets, such as individual bonds that can be liquidated without loss if additional cash is needed.
3) What is the cost structure of my investment portfolio and how much do I pay my financial advisor? How do those compare to industry averages?
Studies have shown that costs are a major determinant to a portfolio’s ability to achieve the desired investment results. Without knowledge of overall cost structure, it also may be difficult to determine the advisor’s ability to add value net of fees.
4) How can a financial plan help in navigating this current crisis?
During a crisis, a financial plan can serve as your steward to achieving your financial goals. As emotional beings, we quickly want to react in a crisis to avoid market downturns, mitigate losses and potentially time the upturn. These efforts often prove to be futile. A financial plan can help you answer the question of whether it is right to make a change to your investment allocation. Does the current crisis warrant you making a change to your spending habits? Has this short-term dip impacted your long-term goals in any way? Informed, educated decisions will lead to the peace of mind we are all searching for in times of market distress.
5) What are some near-term opportunities?
A few things you can do in the short term are the following:
- Rebalancing
- Tax-Loss Harvesting
- Estate Planning
Rebalancing — During a crisis we can utilize the market’s movements to our advantage. Selling your bonds and purchasing stocks while they are on sale. This historically has led to a quicker recovery in your portfolio and long-term out performance. You must remember that rebalancing is also important when the market increases over time. Selling stocks to capture gains and allocating those funds to bonds.
Tax-loss harvesting — is a great way to capitalize when the market is down. This strategy involves you selling your current securities to realize your losses. On the same day, you purchase a security that keeps you invested in the market but isn’t substantially identical to what you sold. This strategy will allow you to capture your losses and offset any gains you may have in the portfolio in the future. We would recommend working with an investment advisor or CPA when executing this.
Estate planning — this strategy can encompass a lot of various things personal to your individual situation. Reviewing your estate plan with your attorney is a great way to find opportunities. One example is gifting shares to charities or family members while the market is down to get more out of your estate at one time.
6) Is the level of risk I am taking in my portfolio still appropriate?
A lot of investors find themselves sticking with a portfolio allocation for decades or longer only to realize their risk preferences have changed when they see their accounts drop during a downturn. This can be a good time to see if it is still appropriate to take the amount of risk in your portfolio or possibly become more conservative.
Everyone is experiencing this pandemic differently — mentally and financially. Advisors can bring you calm and reassurance. For those that find themselves in need of a financial advisor for the first time, or simply want guidance to analyze their current financial advisor, there is a list of questions designed to provide guidance for individuals and families who want to select the best possible advisor at a reasonable cost. Visit asiwealthmanagement.com/advisor-questions/ to read more. It will take some work on your part, but partnering with the right financial advisor should help you reduce your financial stress and provide you the confidence for your financial future.
Randy Miller is President of ASI Wealth Management and Consulting Services. He began his investment career in 1987. Miller co-founded the firm in 1998. ASI oversees approximately $1 Billion in assets and provides comprehensive wealth management services and consulting services to clients in and around the Pacific Northwest. ASI is headquartered in Bend and has offices in Seattle, Portland and Medford, Oregon. Randy lives in Bend.
