When markets decline as they have during the COVID-19 pandemic, many people panic and end up selling their investments at a significant loss. But if you remain calm, you can look for opportunities that strengthen your long-term financial position. A financial advisor can provide the expertise that helps you take advantage of a range of financial strategies to grow your wealth and achieve your goals.
But what kind of advisor should you work with? We recommend independent financial advisors who operate on a fee-only, fiduciary basis. Unlike broker-dealers, who can earn commissions for selling you certain financial or investment products, a fee-only, fiduciary financial advisor will earn their fees from only their clients.
Your fee-only advisor may charge you based on a flat fee, or hourly, or on a percentage of the assets they manage for you. Regardless, by forgoing commissions, they align their interests with yours. In fact, as a fiduciary, they are obligated to put your interests before their own.
Here are some of the ways an independent financial advisor may help you in times of down markets.
Identify Financial Opportunities
Your financial advisor is likely to start with your goals, such as a comfortable retirement. Once they understand your goals, both short and long term, they’ll begin crafting financial strategies to help you reach your objectives and improve your financial position.
For example, they may recommend that you convert a traditional IRA into a Roth IRA. By doing so now, while markets are down, you will pay less—even significantly less—in taxes than you would at the height of the market. And the Roth IRA will give you tax-free withdrawals in retirement, which can be especially helpful if taxes increase as many financial professionals believe they will.
As the manager of your investment portfolio, they will seek out opportunities to help your portfolio recover along with the markets and achieve long-term growth. For example, you may have excess cash that you can invest now and buy equities at significant discounts. However, this is a move you should do only if you have a financial foundation to withstand continued market losses. Your advisor, serving as your fiduciary, will assess your entire financial situation to help you decide whether to invest more or stay put.
Part of this decision comes down to your risk tolerance, or ability to withstand market drops. Your time horizon, or how long you have until you need the money in your portfolio, is also important. These factors and others will help you and your advisor in reviewing your asset allocation and determining whether adjustments are needed.
For example, you may be highly concentrated in U.S. markets and would be better served by diversifying into international investments. Although no one can predict the markets’ direction, research indicates over and again that diversification helps mitigate short-term variability and helps optimize long-term returns.
You can also talk to your advisor about whether now is an optimal time to rebalance your portfolio. For example, you may have an ideal allocation (a determination your advisor can help you with) that is 60% equities and 40% fixed-income investments. Over time, your allocation will shift—say to 50%/50%. In this case, now could be an ideal time to sell high and buy low through rebalancing that returns your portfolio to your target allocations.
It isn’t likely that all these examples will apply to your situation, and that’s where an independent financial advisor can help. By understanding your situation and your goals, they can recommend down-market strategies that are tailored to your needs and objectives.
This material was prepared by Kaleido Inc. from information derived from sources believed to be accurate. This information should not be construed as investment, tax or legal advice.