"Financial Planning ... it's not always about money."

3 Questions To Ask Your Advisor Right Now

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David M. Brenner, ChFC®, CLU®

D. M. Brenner, Inc.
Phone : (858) 345-1001
Schedule a Meeting

The roller coaster of the past 3 months leaves many with the same basic questions. Are you swimming naked?

I can break my 34-year investment career into 2 distinct periods: those times where most people did not really follow the stock market closely, and those when it was front-of-mind. For several years at a time, markets go about their way, mind their own business, while the non-financial media and their audience don’t really pay them much attention.

Then, you have the last 3 months. The stock market is front-page news, and suddenly, everyone is tracking it very carefully. As a by-product, more investors (especially younger ones), start to seize the opportunity to replace sports betting and card-playing with stock trading.

And, those approaching retirement quickly perk up and realize their portfolios are not as bullet-proof as they had thought. Warren Buffet famously said that “when the tide goes out, you can see who was swimming naked.” So, how’s your investment portfolio’s wardrobe looking these days?

Here are 3 questions many pre-retired and already retired investors should be asking themselves, or their investment advisor, if they have one.

QUESTION 1: Am I taking too much risk in my portfolio?

This is a complex question. That’s not because of all the gizmos the industry uses to pry your “risk tolerance” out of you so that you can be placed neatly in a risk range for strategy and compliance purposes. “Risk” has more to do with the question, “How much is enough?”

In other words, are you taking on risk of major loss because you want to “run up the score” with your wealth? Because if there were ever a time to take only the amount of risk of major loss that is absolutely necessary, it is now.

Conventional wisdom is not always so wise

The toughest part of this is that so much of “conventional wisdom” about risk of major investment loss is NOT in the best interests of the client. It may instead be in the best interest of someone trying to keep you from leaving with your assets. All of the hype about “long-term investing” should land on deaf ears when it translates to your having to be OK with that occasional 20-30% drop in your portfolio’s value.

This should be unacceptable to ANY investor. However, a long bull market in stocks and bonds has created complacency about how cyclical and inconsistent the markets really are.

QUESTION 2: Why do I own what I own?

A client asked me recently why we were not invested in some of the iconic, long-standing blue-chip companies. The implication was that the good old days were simpler. No fancy ETF names, put and call options were not in the arsenal, etc. I commiserate with that. And yes, it is easier to follow along when you recognize the names of the investments that pop up on your statement each month, or through your online account portal.

My response: I can’t wait to own individual stocks again. But for now, I am letting the ETFs and broad market call options do the job on “offense” instead.

The problem with stocks today – the world has changed around them

Frankly, there is a risk that some iconic businesses could be bankrupt in a few years. That’s not a prediction, but a way to explain how much uncertainty there is about the future of corporate health in this new environment.  Remember, many public companies have been levered up with debt for a decade. Now, the economy is in the tank.

I aim to buy stocks again (instead of ETFs or options for offense) when I feel the following 2 conditions are likely:

  1. We can hold them for a year or more (long-term gains, if in a taxable account)

If we make a lot of profit very quickly, that’s a nice backup plan, and anything is a sell candidate if the market pushes it up much faster than I expected.

  1. We won’t lose more than 10% from cost at any point during our holding period

I can’t say that with confidence about ANY stock right now. That’s why we own ETFs and call options instead of stocks – less company risk. To summarize, I see this as an environment better suited for “renting” than “owning” anything in the stock market.

QUESTION 3: If we get another selloff like earlier this year (or worse), what’s the plan?

What truly matters in portfolio management, whether you do it yourself or have guidance, is this: Can you manage through the most volatile, emotional markets periods, without throwing away years of good progress during the “easier years?” The broad stock market has had a historically-strong recovery since late March. That gives everyone who saw their financial lives flash before their eyes a chance for a “mulligan,” a do-over. This is the case even if you “sold out” of the market during all of the March Madness.

But, what do you do now, given the warning shot we just witnessed? Perhaps we will not have another selloff of that magnitude for the rest of our lives. Maybe this was the worst it will get. We all hope so, don’t we?

But hope is not an investment strategy. Your first priority when starting or continuing an investment plan is to design your “escape hatch” plan. That is, what methods and investing tools will you deploy to keep your wealth intact?

Better than hope

And, how will you make it so that you keep moving forward toward your ultimate retirement objectives? Essentially, you can stumble during this race, and still win if you don’t fall down.

We just had a dress rehearsal. If your portfolio is the same as it was a few months ago, with no adjustment to strategy, you have to consider that a repeat performance by the stock market won’t turn out too differently.

This is why it is imperative that you “game-plan” a wide variety of real-world scenarios, and truly convince yourself that your portfolio is set up to do what you want and need it to do. Just because the market’s weather turns rough, it doesn’t mean you need to sit there and take it.

This article was written by Rob Isbitts from Forbes and was legally licensed by AdvisorStream .

© 2023 Forbes Media LLC. All Rights Reserved

This Forbes article was legally licensed through AdvisorStream.

David M. Brenner profile photo

David M. Brenner, ChFC®, CLU®

D. M. Brenner, Inc.
Phone : (858) 345-1001
Schedule a Meeting