I have the same financial advisor as Guy Fieri and Draymond Green. But, my portfolio is down 42% YOY.
My portfolio performance got me thinking…when should I stop having a financial advisor, and just do it myself?
When should you stop having a financial advisor?
From not confusing a bare market with a bad advisor to the importance of a long-term perspective, here are 9 answers to the question, “Should I cut ties with my financial advisor if my portfolio is down by 40% this year?”
- See the Bigger Picture
- Establish a Baseline for Comparability
- Develop a Framework for Making Financial Decisions
- It depends On the Portfolio Status.
- Conduct a Thorough Analysis
- Don’t Confuse a Bare Market With a Bad Advisor
- Investments are Subject to Market Fluctuations
- Long-term Perspective is Important
- Depends Based On the Performance
See the Bigger Picture
From my experience, when it comes to portfolio losses, I always have asked myself one question: Is it the fault of my advisor, or is this just bad luck due to macroeconomic factors? If your advisor truly botched their advice, then you should certainly consider cutting ties. However, if the portfolio losses are mainly due to economic impacts, such as a recession or weak stock market, then you may want to wait until more information on the economy becomes available before making any decisions.
Establish a Baseline for Comparability
Portfolio performance is subpar. Most financial planners will provide you with a breakdown of your portfolio’s results when you arrive for your yearly or quarterly appointment; if they do not, you should request it. But until you have something else to compare it against, it doesn’t really mean anything. For instance, you won’t realize a 10% return isn’t terrific unless you tell the S&P 500 increased by about 16% in 2020. Establish a baseline for comparability in advance, such as the typical target-date fund performance for a person your age. Give your consultant a second chance to perform if your investment is drastically off one year and their justification makes sense. Get a second expert opinion, however, if it declines the next year when all markets are rising.
Develop a Framework for Making Financial Decisions
A sudden decline in the value of your portfolio could be a result of an external event that your financial advisor could not have foreseen. However, a decrease in value over a period of years is usually an indication that the advisor is not providing suitable advice. In such a case, it would be wise to cut ties with your financial advisor and find one who can provide better returns on your investment. But understand that while financial advisors can help you position your portfolio against risk, none can see the future, so your portfolio will always be subject to the vagaries of the market. Instead of judging the quality of a financial decision based on an arbitrary outcome, assess whether the decision made sense given the information available and whether you would still make that decision given similar information. This is the only way to develop a good decision-making process and be able to assess whether you are receiving quality advice in the future.
It depends On the Portfolio Status
The answer to this question depends on the reasons behind the decline in your portfolio. If you and your financial advisor have been following an appropriate strategy based on sound research, then your losses may be part of normal market volatility. In such a case, cutting ties with your advisor could be counterproductive as they may be able to help you stay the course. However, if you feel that your financial advisor is not acting in your best interests, then it may be wise to consider cutting ties and finding a new financial advisor.
Conduct a Thorough Analysis
No, you should not cut ties with your financial advisor solely because your portfolio is down 40%. It is important to consider the performance of the overall market conditions and the general economic climate, government policies, changes in the industry, and other factors that can have an impact on your portfolio and whether the advisor was able to provide sound advice amid a volatile situation. It is important to look at the entire picture and see what caused what, only then can you make an informed decision about whether or not you should break ties with your financial advisor. I think a 40% drop in your portfolio is a matter of concern, but it is not the only factor to consider when deciding whether or not to cut ties with your financial advisor. You must conduct a thorough analysis of all the elements involved.
Don’t Confuse a Bare Market With a Bad Advisor
A portfolio being down by 40% can seem scary, but it doesn’t necessarily mean your financial advisor is to blame. Anyone willing to invest is at the behest of the financial market. You should know what that entails from a volatility perspective. You could have the smartest person in the world managing your money and still be down in any given year. However, if you feel your portfolio’s allocation is far riskier than what you’ve communicated to your advisor, it can indicate a potential bad fit. If a corresponding index is performing better than your tailored portfolio and is structured similarly, that behooves having a question answered by your current financial advisor as to what is going on. Any good advisor will get ahead of these types of questions in your initial meetings, so you shouldn’t have to guess why something is down.
Investments are Subject to Market Fluctuations
No, you shouldn’t cut ties with your financial advisor just because your portfolio is down by 40% for one year. It’s important to remember that investments are subject to market fluctuations and may not always perform as expected. You should talk to your advisor to understand why your portfolio is down and if there are any strategies they can suggest to help improve it. Furthermore, it’s important to remember that investing is a long-term strategy; one year of losses doesn’t necessarily mean that your financial advisor isn’t doing a good job.
Long-term Perspective is Important
If it aligns with your investment goals and risk tolerance. If you are not comfortable with the performance of your portfolio, you should discuss it with your financial advisor to understand the reasons for the decline and to determine if any changes to your investment strategy are needed. Additionally, it is always a good idea to have a diverse portfolio; diversification can help to reduce risk. It is also important to note that past performance is not indicative of future performance, so it is not appropriate to base your decisions solely on the recent decline. It is also normal for the stock market to fluctuate, and it is hard to predict the future. In general, a long-term perspective is typically best when it comes to investing.
Depends Based On the Performance
The decision to cut ties with your financial advisor should be based on the performance of their services, not just on your portfolio’s performance. If you believe that your advisor is no longer providing you with the best advice or guidance for your financial goals, then it may be time to consider changing advisors. However, if you are still confident in your advisor’s ability to provide sound financial advice, then it would be best to look into other factors that might have contributed to the decline of your portfolio. Ask your advisor for an explanation and review any changes your advisor has made recently and how those changes may have impacted your portfolio performance. If you believe that the portfolio’s decline is due to factors outside of your advisor’s control, then it may be best to maintain the relationship and let them guide you through this difficult time.
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