I have been writing about risk this week in an effort to help you understand how to manage your investments. You can go to Part 1, Part 2, and Part 3. In my final installment, I want to focus on the advisers role when it comes to risk. You basically have three types of financial advisers today. You have the financial adviser who is focused on selling product to people. You have the financial adviser who buys and holds and never sells investments no matter what is happening in the market. Finally, you have an adviser who has a strategy built in to compensate for risk.
BIAS alert - I have a bias on this subject because I am a financial adviser who manages for risk and think that it is the best way to achieve long-term goals. Now, let me tell you why.
Adviser Red Flags
If you are working with an adviser, it is smart to have a conversation with them about risk. What are you going to do if the risk level increases in the stock market and we end up in a bear market?
This is a crucial question and one whose answer you need to be comfortable. Here are some red flag answers:
"You are a long-term investor. We will wait it out because the market always comes back."
That is simply saying - I don't have a strategy for risk. First of all most everyone is a long-term investor. Thus that really has nothing to do with anything except you have the time to take the losses and make them back. For this strategy to work, you have to have the time to make up the losses. That is not just getting back to even. You have to make up the loss of opportunity each year as well. Second, you have to count on retiring at the right time so to take advantage of the good times. In many cases, the stars would have to align for that to happen.
"You can't time the market, Investors always sell at the wrong time and miss the rebound."
Selling mutual funds and reducing risk in your portfolio is not about timing the market. It is about managing for risk. Timing is trying to pick the top of the market and the bottom of the market so that you sell and buy at the most perfect time. This is about risk management.'
Remember there are 5 stages when it comes to investing.
Tracking your results
Most advisers stop at investing when that is where the critical work starts with the management process. It is important that an adviser acknowledges risk and has a plan B to use in the event that the probability of severe losses presents itself. Remember, plan A is for a normal market. Plan B is when things get off course. Plan B risk management plans come in all types and sizes. Just make sure your adviser has one and that you feel comfortable with it.
If you want to learn more about plan B investing, send me an email at firstname.lastname@example.org and I will show you how I manage investments.