Read quite a few news articles that many investors asking the question whether to fire their financial advisors because their investment lost money last year. Perhaps the first question is to ask whether portfolio mix is suitable for the investors’ investment horizon – how long they can keep it invested without withdrawal. The second question is risk tolerance, but it can be enhanced with proper financial literacy education. Any kind of investment harbors risks including cash and GIC due to inflation. The third question is whether the financial advisor set the right expectation with the clients and whether he or she takes the time to explain to the clients why the portfolio mix was determined that way. What could be the worst scenario.
The last question is to ask the advisors how the investment portfolio will perform in a few different economic cycle such as recession, growth and inflation. How each component of the portfolio mix will react to each cycle. The key is to have at least one component of the mix can perform well in each cycle. Make sure to ask the financial advisor that. If the answer is to top into the cash reserve. That is not good enough. That cash reserve is for a few years living expense when all hell breaks loose. It should rarely happen if the portfolio can cover the above three economic situation.
The usual 40/60 stock and bond mix can be down too. Last year, the bond price and stock price both went down due to inflation that we haven’t experienced for more than a decade. However, the challenge is that many investors do not have a big portfolio. Many advisors only reserve time for the high-net-worth clients. For majority of the investors with a moderate size portfolio, it is hard to get the right degree of attention they need. That’s the challenge for the industry.
Hope we all have that professional with integrity and competency who we can trust and turn to for good financial advice.