With the S&P 500 stock index down 12% year to date and uncertainty clouding the picture for global markets, nervous investors could be looking to review their financial plans.
Inflation is at its highest in 40 years, the Federal Reserve is expected to hike rates several times in 2022 to tame hot prices, and geopolitical tensions are high with Russia’s invasion of Ukraine. The volatility index, known as the VIX, is at its highest level since June 2020 on the back of these events.
This sort of volatility can make even the most seasoned investors emotional about their investments. During such volatile markets, it’s important to ask your financial advisor the right questions. Furthermore, an advisor should be able to respond to your questions in a way that helps you to understand the answers.
“If the answers don’t make sense to you, it may be time to look for a different advisor,” says Beau Henderson, founder and lead retirement planning specialist with RichLife Advisors.
Here are six questions to ask your financial advisor during market volatility:
— How does your firm manage financial plans in a bear market?
— Does this change my retirement timeline or income plan?
— How will you tap assets?
— What is your plan for inflation?
— What’s your plan for fixed income?
— What’s your outlook for this year and next year?
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How Does Your Firm Manage Financial Plans in a Bear Market?
The stock market has not witnessed a sustained correction in a decade, so newer financial advisors have not experienced bear-market conditions, says Nick Foulks, director of communications strategy and client engagement at Great Waters Financial. However, that’s not necessarily a reason to leave, he adds.
Advisors should describe a strategy to manage market volatility, he says. Advisors should have plans in place for their clients so clients know how the portfolio will be affected by market swings, including a potential worst-case scenario such as a 2008-type market drop. Clients should know how their advisor will communicate with them and how they can reach out to their advisor on their own.
“It’s not just managing the account. It’s also managing the emotions of the people they are serving,” Foulks says.
Gregory Lawrence, certified financial planner and founder of retirement planning firm Lawrence Legacy Group says advisors should explain to clients any plans about making trades or other changes to protect positions. “A lot of them don’t have anything. They’re just long and hope things (rebound),” he says.
Does This Change My Retirement Timeline or Income Plan?
In the past few years, rising stock market prices and home values encouraged a number of people to retire early during the pandemic. As stocks fall, people may need to revisit those plans, Foulks says. An advisor can review whether clients remain on track to retire or what delaying retirement by six months to a year would do to bolster savings. An advisor can look at several scenarios, including delaying retirement or picking up part-time work, or consider other scenarios to bring in income.
Clients should review whether a market downturn will affect how much money they can pull from their accounts, Foulks says. Many retirees take out a set amount of money each month from their portfolios to live on, so this question gets at the heart of a spending plan.
“It’s not just about ‘What is my balance at the end of the month or the end of the quarter?’ It’s ‘How does my income change?'” Foulks says.
How Will You Tap Assets?
Advisors should have specific plan for which assets they will tap to provide income, to avoid what Henderson calls “the devastating impact of sequence-of-returns risks in a volatile market.”
Sequence-of-returns risk occurs when too much money is withdrawn from an account in a way that harms future portfolio growth. Hefty withdrawals can especially be an issue when prices are falling. Investors should ask to see the specific plan the advisor set up to make withdrawals, rather than assume a plan is in place.
To avoid this risk, many financial advisors will use a “bucket” system, putting a retiree’s money into three buckets addressing 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.
Depending on clients’ risk tolerance, Lawrence says, having a sizable amount of money in cash means they don’t have to sell something at a distressed price.
What Is Your Plan for Inflation?
Inflation reached 40-year highs in February and so far does not show signs of abating. Inflation eats into a person’s purchasing power. The Federal Reserve is expected to raise interest rates several times in 2022, perhaps as much as six or seven times, to combat rising prices. Investors’ asset allocation may need to change to reflect a different the economic environment, says Nick Giacoumakis, president and founder of NEIRG Wealth Management.
He says his firm is buying financial and insurance companies since a rising-interest-rate environment means banks can make more money on the spread between the interest rate they pay on deposits and loans they make. He particularly likes banks such as JPMorgan Chase & Co. (ticker: JPM), Bank of America Corp. (BAC) and PNC Financial Services Group (PNC) for their diverse lending businesses.
Other sectors that do well with rising prices or higher rates include energy and materials, plus businesses with pricing power to pass through higher costs such as consumer staples and apartment real estate investment trusts, or REITs.
Lawrence also recommends hard assets such as gold and silver, or owning mining stocks such as Barrick Gold Corp. (GOLD).
What’s Your Plan for Fixed Income?
Advisors often focus on stocks, but fixed income is an important part of a portfolio. Last year the bond benchmark Bloomberg Barclays Aggerate Bond Index lost money. With rates rising, advisors should be shorting bond duration and maturities, Giacoumakis says. He uses floating-rate bonds, which can rise as rates do. However, he cautions not to add a significant amount of these vehicles because they often contain high-yield debt of lower credit quality. Other places investors can find higher rates are emerging markets.
This may also be the time to look at annuities or other options to create stability, Foulks says.
What’s Your Outlook for This Year and Next Year?
This macroeconomic question should give clients an idea of the advisor’s overall mindset, Giacoumakis says.
“If the advisor has an attitude that this is just fine, this is another buying opportunity, blah, blah, blah, blah, that would raise a flag of caution with me,” he says.
Giacoumakis’ firm is taking a defensive posture and preparing for a series of interest rate hikes, which could put downward pressure on stocks. While he hopes for the best, he’s also preparing for the worst, while still looking for potential buying opportunities.
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Questions for Your Financial Advisor During Volatile Markets originally appeared on usnews.com
Update 03/08/22: This story was published at an earlier date and has been updated with new information.
