“Aren’t you supposed to know when to get in and when to get out?
Aren’t you supposed to protect my accounts before they go down?
Aren’t you supposed to help me make money AND help me not lose it?”
These are questions I don’t get very often, but questions I’m sure every client thinks of, especially in years when accounts are down. As a financial advisor, I’m constantly asking myself “what could I have done differently?” I ask myself this question in Up years. In Down years. In Flat years. When it comes to our fiduciary role as investment advisers, we’re caught between making too many changes and making too few.
Investment management is just one of the things financial advisors bring to the table. Cash flow, budgeting, risk management, wealth accumulation, retirement income planning, tax strategy, and estate planning also play into someone’s bigger financial picture. The investment side is usually front and center since it’s shoved down our throats every day by the media, so it’s easy to get distracted by whatever happens to be today’s crisis.
It’s been said that most investors not only underperform the markets, they also underperform their own investments. In other words, if most investors simply left their investments alone for long enough, the investments would likely live up to expectations. There are no guarantees and past performance isn’t an indicator of future results. Still, investors can’t help but want to time the markets. It’s natural to only want to make money and never lose any.
It’s easier to take more risk when our account values are moving up and it’s easier to be risk-averse when account values are moving down. Diversification is the idea that different investments will move at different rates and times, so you’re spreading out risk to protect against smaller market movements. In big downturns, everything can fall together. And if you have multiple accounts, each account might have a different objective.
We’re willing to take risk because we want more money in the future. But there’s a difference between the risk we’re willing to take and the risk we need to take to help us fund our future goals. The risk we’re willing to take changes depending on what’s happening around us. The risk we need to take – calculated, purposeful, and strategic risk – shouldn’t change unless our goals change. Stepping outside the comfort zone is hard, but it’s even harder to look back and realize we should have taken more risk along the way.
We lead with and focus on a financial plan because it’s not important what accounts are doing right now, as long as they’re still on track to do what we need them to do…fund future goals.
If your “long run” feels like it’s getting short, it might be time to reevaluate your risk tolerance and update your investment strategy.
And don’t fall into the trap…you don’t always have to make a move. It’s ok to just stand still.
*A diversified portfolio does not assure a profit or protect against loss in a declining market.