If investors learned anything during the past 18 months, it’s that the stock market can be volatile.
Prior to the coronavirus pandemic, market gyrations were tame for several years. When the virus caused the global economy to shut down, markets plunged in 2020 in the fastest onset of a bear market on record, starting in late February. It was also the most short-lived bear market, as stocks rebounded in a few months.
That sort of volatility can make even the most seasoned investors emotional about their investments. And during such volatile markets, it’s important to ask your financial advisor the right questions.
Here are six questions to ask your advisor during market volatility:
What Are Your Fees?
Understanding how a financial advisor is paid is important no matter what markets are doing, but it can be especially pertinent when markets are frothy, says Ryan Shuchman, investment advisor and partner at Cornerstone Financial Services.
There are a few ways financial advisors are paid, and those who are fiduciaries have generally moved to one of two models: flat fee or percentage of assets under management. Flat-fee advisors charge a single fee to advise clients over the course of a year. Those who take a percentage of assets under management use a sliding scale that lowers the fee as assets increase. Ask your advisor whether the fee would change if your assets were to fall sharply during a volatile market.
In addition, “if you’re asking somebody to manage your affairs, and their answer isn’t transparent on how they get paid, it’s a big red flag,” Shuchman says.
Can We Review My Plan?
Brian Kennedy, wealth planning advisor and president at KCA Wealth Management, says advisors who create a detailed financial plan will ask about their clients’ goals and then gather all their financial data, including retirement accounts, tax returns, investments and other information to create a holistic picture of their wealth. Advisors may look for gaps in coverage, in the area of wills or life insurance, for example.
Advisors should run several scenarios that show how different types of market conditions will affect the portfolio, and that will give clients a sense of how their finances will hold up during volatility, Kennedy says. “If you have a plan, and you’ve stress-tested that plan, and those assumptions being used in your plan are relatively reasonable, then you should feel comfortable,” he says.
If you get married, have a baby, divorce, lose your job or have some other significant life event, you should also talk to an advisor, he says. That could warrant a change of plan.
Will My Withdrawals Be Affected?
A sound financial plan should safeguard against sequence-of-return risk, which is withdrawing too much money from an account in a way that harms future portfolio growth. Hefty withdrawals can especially be an issue when prices are falling.
To avoid this risk, many financial advisors will use a “bucket” system, putting a retiree’s money into three buckets: short-term, medium-term and long-term needs. The short-term bucket contains money used for everyday expenses and is kept in liquid accounts. The medium-term bucket holds money that may not be needed for about five years and is invested in holdings that can accrue some return. And the long-term bucket is for money that’s not needed for a decade or more and has time to grow.
“If it’s 10 years away or more before you touch (that money), you can take the risk and not worry about that volatility,” Shuchman says. As a client prepares to transition into retirement, he adjusts the portfolio to take less risk and preserve more capital, mitigating the impact of volatility.
Can We Review My Risk Tolerance?
Jeff Busch, partner at Lift Financial, says people should review their risk tolerance if they haven’t sat down with their advisor in a while. Specifically, “if you haven’t met with your advisor for a year or more, then your outlook on the markets likely has changed,” he says.
Advisors will ask clients several risk-profile questions to help them determine the client’s ideal portfolio. “It’s important that the client is comfortable with how they’re invested, so there’s no really big shockers when the market goes one way or the other,” Busch says.
That doesn’t mean the investments will change, necessarily, but it’s important to be aware of the ups and downs of share prices and the potential for current holdings to be swapped out.
What Opportunities Are Available?
Market volatility isn’t always something to fear. Price swings can sometimes open up opportunities. For example, tax-loss harvesting is one possible action advisors can take when prices fall, selling losing positions to help offset clients’ overall tax liability during filing season, Busch says.
Volatility can also mean buying opportunities. Shuchman says that during 2020’s market sell-off, he saw “significant opportunities” to buy corporate debt, which at the time was selling at discounts of 30% to 40%. Last year was “very opportunistic for us where we added corporate-debt positions, which performed outstanding for the remainder of 2020 and into this year,” he says.
Should I Worry About Inflation?
Kennedy says that given some of the concerns about rising prices, clients should ask their advisors about what type of inflation assumptions are worked into their portfolio and how the investments may fare if prices increase. Some advisors may use consumer price index data as an inflation gauge, he says, but there’s a difference between national figures and an individual’s personal inflation rate. That rate boils down to how much a person spends on certain goods and services and how those costs may rise in the future.
“Personal inflation means maybe you have to spend more on prescription drugs than someone else, or maybe you are strictly organic and you don’t eat anything else,” says Kennedy. “Your prices are going to be higher. Those are things to consider within your plan, too.”
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Questions to Ask Your Advisor During Market Volatility originally appeared on usnews.com
Update 05/14/21: This article was published previously and has been updated with new information.