Is it necessary to hire a financial advisor during a bear market?
I think that it is always a great time to hire a financial advisor when you are making important decisions as I laid out in my article on Planning Through Life's Stages to Avoid Money Worries. But it is even MORE important (if not necessary) to do it during, or hopefully before, a bear market. It is during a bear market that most people throw their investment "discipline" and financial plan out the window due to the market fear and "go to cash". That it is why it is so beneficial to have a financial advisor and financial plan to help assure that you stick to the discipline when your "gut" tells you to change...typically as the WORST Time. I have a few articles on CNBC that discuss both:
- Afraid of retiring into a bear market? Tips to hedge bets
It is also important to have a good conversation with and interview a fianncial advisor to make sure that they have good experience, have clients that have worked with them through a "bear market" (they have experence in bear markets) and that they don't fall into the fimilar traps and mistakes that many financial planners do wrong.
During a bear market, a financial advisor can review your investment portfolio. Adjusting your allocations ahead of time can help weather temporary dips in value. One element an advisor can look at is how diversified your portfolio is to help reduce risk while targeting sufficient returns in order to fight inflation and provide adequate returns.
The right question may be whether it is right for you to hire an investment adviser at all.
Quality financial professionals have value in both bull markets and bear markets, and turning points in the market or personal situations are where they can make a substantial difference. Since one never really knows where the turning points will be, the right investment adviser can provide value throughout ones life. Additionally, if an individual wants to continually engage and disengage services depending on market conditions, they may find few takers on the advisory side of any quality, as effectively managing an on again, off again client relationship is challenging.
If the answer to the first question is yes, you would like to have an adviser, the second question would be, if an adviser has value in a bull market, why would they cease to have value in a bear market. Of course, value like beauty, is in the eye of the beholder....
Hope this helps,
It's never necessary but often wise. Lately, index investing is all the rage. The S&P 500 has done well, rising for eight consecutive calendar years. (It appears this will be the ninth.) At such times, it's very appealing to invest in an index fund, matching the good performance of the S&P at very low cost. However, the years when financial advisors often prove their mettle are the times when the market melts down, such as 2000, 2001, 2002 and 2008. Losing less in a downturn may seem like merely something nice, but it's actually more important than that. Consider two advisors, Joe Offense and Johnny Defense. Joe Offense makes 20% in year one, another 20% in year two, and loses 15% in year three. Johnny Defense makes 15% in year one, 15% in year two, and loses 5% in year three. Who creates more value for clients? It's Johnny Defense, with a a 25.6% total return for the three years, as against 22.4% for Joe Offense. There are many permutations, and many styles of investing that can be successful. But giving ground grudingly in a bear market is certainly an important attribute for a manager.
Some would argue that during difficult economic times is when a good financial advisor earns their keep.
Within the industry, the saying “a rising tide lifts all ships” is routinely quoted during stretches of general economic expansion. In other words, the consequential differences between sound financial decisions and those that are less so might be less severe during times of prosperity, when the margin for error may be wider.
However, when economic stress enters into the equation, even seemingly innocuous financial and investment decisions can have outsized consequences.
If nothing else, when the tide turns, a good financial advisor can serve as a sounding board and a stabilizing factor when it seems that difficult decisions need to be made.
Although I’m certainly biased in this regard, I believe that having a relationship in place with a financial advisor that you know and trust prior to an economic downturn can increase the value of the relationship during more difficult situations. It takes a while to develop trust, and trying to do so under stress is less than ideal.