This article was originally published in our weekly newsletter.
I am hearing more and more that “I’m doing better than my current advisor, so why would I need him/her?”
This thought process could be considered dangerous, and not for the reasons you would expect.
I have no problem with people managing their own assets.
In fact, I encourage people to learn about the market and what is going on.
For the right person, it may make sense for them to manage some or all of their investments.
However, my concern is the disconnect between the claim and the comparison.
First, what did you ask your financial advisor to do?
How much risk did you let him/her know you were willing to take?
Are you doing an apples-to-apples risk comparison between the advisor’s portfolio and your portfolio?
Let me explain with a little history lesson.
In the 90s, the market was growing at an incredible rate.
It was so easy to make money, monkeys throwing darts were making money.
Below is an example of what your portfolio could have looked like in 1999.
The purple line is the Magnificent 7 (Nvidia, Apple, Amazon, Microsoft, etc.) equivalent in the 90s (Microsoft, Apple, General Electric, Intel, Oracle, IBM, and Amazon).
The blue line is the S&P 500.
The orange line is your typical 60/40 stock and bond fund split.
At first glance, you might think that concentrating on a few stocks was the right move and that the 60/40 advisor portfolio did not perform well enough.
Notice the short timeline with the comparison.
Those who focused on the maximum growth looked pretty smart, until things changed.
Here’s what happened in 2000 and 2001.
Those who took more risks lost more money.
You may think, “The growth gained in 1999 made up for the eventual losses.”
Here’s what it looked like from 1999 to the end of 2001.
Indeed, by the end of this timeframe, the purple line performed better.
However, could you have stomached the rollercoaster?
Would you have been OK giving up those kinds of gains?
At one point (the end of 2001), the boring 60/40 portfolio was worth more than the seven stocks and the S&P 500.
Now, let’s go back to the original conversation that suggested the individual investor was doing better than the advisor.
What are you asking your advisor to do?
Was it to manage a moderate risk portfolio?
If you had said risk is of no concern, and you wanted a very aggressive portfolio, would you have been recommended something different?
How much risk are you willing to take?
Would you have been OK with the rollercoaster?
Are you OK with significant drops?
Or, do you want something more predictable?
It’s OK either way, as long as proper expectations are being met, and you understand the risk you are taking.
Chances are, if you want more growth potential and are willing to take more risk, a financial professional could help you build out a more strategic portfolio.
You’ll never know unless you ask.
Having individual stocks, such as Nvidia and Palantir, is considered risky if you need to money in the short term.
If you don’t need to touch the positions for 10+ years, then maybe it is not as risky as you may think.
Context is important.
If you have a concentrated portfolio focused on a few stocks, and you are getting closer to retirement, it may be time to sell a few of those shares and lock in your gains.
That doesn’t mean you should sell it all.
This means that if you sell some of your position for a profit, you can lock in those gains, reinvest the proceeds elsewhere, or spend funds as income.
Just remember, you cannot separate risk and growth potential.
The more risk you take, the more growth potential you have.
Are you taking the right amount of risk?
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How to run the numbers and see when you can afford to retire (It’s easier than you think).
Learn why many common retirement income strategies may be riskier than you realize.
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How to proactively anticipate and manage your retirement during the market's ups and downs.
Why it’s typically not too late to course-correct. If you have already retired, there’s still time to get on the right path.
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Investment advisory services are offered through Kedrec, LLC, a Kansas state Registered Investment Advisor. Insurance products and services are offered through its affiliate, Kedrec Legacy, LLC. We are not affiliated with the US government or any governmental agency.
Investing involves risk, including possible loss of principal. No investment strategy can guarantee success, ensure a profit or guarantee against losses. Insurance product guarantees are backed solely by the financial strength and claims-paying ability of the issuing company.
Insurance and annuity products involve fees and charges, including potential surrender penalties. Annuity withdrawals are subject to ordinary income taxes and potentially a 10% federal penalty before age 59-1/2. Life insurance generally requires medical and potentially financial underwriting to qualify for coverage. Optional features and riders may entail additional annual cost. Product and feature availability may vary by state.
Tax, legal and estate planning services are available only to members who purchase the Fresh Wealth Plan Membership level. Tax, legal and estate services provided by our network of tax and legal professionals. Always consult with qualified tax/legal advisors regarding your unique circumstances.
Investment advisory services are offered through Kedrec, LLC, a Kansas state Registered Investment Advisor. Insurance products and services are offered through its affiliate, Kedrec Legacy, LLC. We are not affiliated with the US government or any governmental agency.
Investing involves risk, including possible loss of principal. No investment strategy can guarantee success, ensure a profit or guarantee against losses. Insurance product guarantees are backed solely by the financial strength and claims-paying ability of the issuing company.
Insurance and annuity products involve fees and charges, including potential surrender penalties. Annuity withdrawals are subject to ordinary income taxes and potentially a 10% federal penalty before age 59-1/2. Life insurance generally requires medical and potentially financial underwriting to qualify for coverage. Optional features and riders may entail additional annual cost. Product and feature availability may vary by state.
Tax, legal and estate planning services are available only to members who purchase the Fresh Wealth Plan Membership level. Tax, legal and estate services provided by our network of tax and legal professionals. Always consult with qualified tax/legal advisors regarding your unique circumstances.