If you have a financial advisor you need to read this — especially if you are one of the 99%. That’s everybody who isn’t a gazillionaire. You may know a few people who fit this bill. Being a 99-percenter just means that you want to do better.In that regard, you’re no different than the 1%. They just have more money and by extension more freedom than you.That doesn’t mean they are any smarter.I know plenty of uber-rich people who are financially inept. You probably do, too.What sets people apart sometimes, though, is as simple as the questions they ask. True 1-percenters have this down pat-even if they don’t have a gazillion dollars.
Here are five things you need to ask your financial advisor today if you want to join them.
If you do, you’ll profit more consistently, reduce your risk and invest with greater peace of mind.
And I have no doubt that you will join the real 1%.
1) Do my investments actually match my risk tolerance and expectations?
No doubt this will cause push back from more than a few financial professionals. But I just don’t believe any investor needs to suffer the ravages of a bear market.
I don’t care if you have $5,000 or $500,000,000 to invest, the principles are the same.
No financial advisor worth his or her salt would let a client liquidate into a bear market. And the good ones ensure that their clients have enough cash and ultra-safe investments on hand so they don’t have to.
If your advisor has you leveraged up to the eyeballs, or fully invested in such a way that you can’t endure a protracted downturn, it’s time to find a new advisor.
I don’t care if it’s an up market or a down market, the best advisors will help you pick investments that match your goals within your financial time frame.
The problem faced by many investors today is that they’ve always thought in terms of returns rather than risks. That’s backwards, especially at a time when the riskiest investments — bonds — were supposed to be the most secure.
This is compounded by the fact that many investors — having lost big twice in the last decade — remain under-invested and are faced with playing catch-up. They never should have stepped off the court in the first place. No matter what the headlines, it pays to stay the course.
In a study of 7.1 million retirement accounts, Fidelity discovered that of those who sold their stock mutual funds between October 2008 and March 2009 (the period of greatest volatility we’ve seen yet), more than 50% had not reinvested as of June 30, 2011.
Those who stayed in the markets, and in stocks specifically, saw the value of their accounts rise 50% on average. Those who sat on the sidelines saw an average increase in their accounts of …wait for it… just 2%.
2) How do my total returns stack up?
Many investors are after the next hot stock or the next sure thing and focus on the percentage returns of specific choices. Understandably, they love being up 25%, 50%, 100% or more.
I’m different. I like not losing money in the first place.
That’s why I’d rather invest with the idea of managing my total returns than throwing darts at specific stocks that may hit…or miss. Over time, I’ll achieve even greater returns.
What people don’t realize is that successful investing is a matter of continuous performance. Not instantaneous performance. It’s one of the reasons I like dividend stocks.
Over time, dividends and reinvestment can count for 85%-90% of total stock market returns.
In some cases, the dividends are so steady and increase so much that you actually make more in dividends than you paid to buy the stocks that produce them.
Ask anybody who’d invested in Altria (NYSE:MO) over the past 10 years. It’s the dividends that make the difference.
Take a look:
Figure 1: Source Fitz-Gerald Research Publications, Yahoo Finance
Granted, that takes time, but time is what you have to work with. Instead of trying to cheat it constantly, learn to work with it.
3) Under what conditions will you sell?
Many advisors actually have no idea on this one. Not only that, but they don’t want you to sell. It’s one of Wall Street’s dirty little secrets.
Think about it….
Selling is not in their best interest. Wall Street makes their money from your money. They want you in the game so they will do everything they can to keep you playing.
This includes creating all kinds of fancy dashboards and gee-whiz programs as a means of drawing you in. You’ve seen the commercials. You know what I’m talking about.
At times, they’ll shift gears and highlight some sort of total care package as in “we care for your money.”
But trust me, benevolence is not in their vocabulary.
If your financial advisor can’t lay out very specific reasons for when and what you would sell, move on. This can be part of some elaborate plan or as simple as a 25% trailing stop.
It really doesn’t matter as long as they have a plan and can clearly articulate that to you without any hemming and hawing when you ask.