After the bold step by Bernanke & Co. to cut rates, what moves should you make? Here are five questions to ask your financial adviser—now
Financial advisers are usually an unflappable bunch. When the markets are wild, investors turn to their financial planners for calm, consistent advice: Stick to the plan, think long term, don't do anything rash. Advisers have studied their history and know that markets go up, down, and sideways; proper investing requires patience.
But the confidence of even the most serene investors has been rocked lately. The U.S. stock market loses a third of its value in a year, the credit crunch grows more severe, and policymakers take unprecedented actions, including on Oct. 8 a worldwide coordinated cut in interest rates by central banks.
If the Federal Reserve can slash interest rates in the grip of a crisis, should investors be making bold moves of their own?
Obviously, your next move as an investor depends on the specifics of your current situation. That might require some professional advice.
There are plenty of questions no one can answer right now: When will the crisis end? Will stocks keep falling, and how far? When will they bounce back?
But an expert adviser should be able to offer important perspective nonetheless. So here are five questions you need to ask—either of your financial adviser or yourself —as the crisis deepens.
What are my actual losses?
From Oct. 9, 2007, the market peak, to Oct. 8, 2008, the broad Standard & Poor's 500-stock index fell 37%. But that doesn't mean all investors have become 37% poorer in the past year. If your portfolio was structured properly, especially if you're anywhere near retirement, you weren't invested 100% in stocks. Smart advisers try to diversify investments by putting some money in bonds, cash, and other safer investments.
"A lot of people are relieved to find they have less exposure to 'Wild West' equity markets than they thought they did," says Milo Benningfield of Benningfield Financial Advisers in San Francisco. Yes, actual gains for your investments in the past year would be a miracle, but you might still be richer (or less poor) than you fear.
Do I have enough cash?
In a risky time like this, the safest investment of all is cash. Many advisers tell clients to keep enough cash to cover two or three years of expenses.
Clients of financial planner Avani Ramnani of Athena Wealth Advisers in Jersey City, N.J., often work in the financial industry, and some are worried about their job security. While they're still cashing a paycheck, "I tell them to build cash reserves," she says.
Workers approaching retirement also should consider switching retirement plan contributions from stocks to "more stable investment options" like cash, says Frank Boucher, a planner based in Reston, Va.
However, most advisers say it would be a big mistake to raise cash by selling their stocks right now—"at the worst possible time you can imagine," says Cathy Pareto, a wealth manager based in Coral Gables, Fla. It's better to wait for stocks to recover—however long that might take—and use cash and even bonds to cover living expenses in the meantime.
"Short-term investors are getting squeezed by the credit crisis," Benningfield says. But if you're saving for retirement and have enough non-equity investments, "you can afford to wait."
Where is my money?
One scapegoat for the financial crisis is the rapid spread of financial instruments that few investors really understand. Ask your financial adviser about all your investments and make sure you feel comfortable with them. "If someone can't explain what they're investing you in, that's a big red flag," Ramnani says.
Examine any options, futures, exchange-traded funds, hedge funds, and commodity funds you hold. If they're too complex to understand, maybe they don't belong in your portfolio.
Also, several advisers said investors should be sure their cash holdings are secure. You might want to sacrifice a lower interest rate for a money market fund that you know is safe. Make sure cash in bank accounts is insured by the Federal Deposit Insurance Corporation.
Can I handle this much risk?
So far, this financial crisis feels more severe than any since the 1970s, and some are pointing to the Great Depression or earlier economic panics for comparisons. "Everybody's got to be a little nervous," Pareto says. "That's just human."
Boucher says this crisis might be a lesson to all investors: In search of big returns, maybe investors have taken on more risk than they can handle. If the declines in your portfolio are giving you serious heartburn, you might consider moving to a less risky portfolio after the markets settle down.
How does this affect my retirement plans?
For investors under age 50, this crisis "is a great opportunity," says Barbara Camaglia of Legacy Financial Advisers in Beachwood, Ohio. "You're going to have time to work through this, wherever it goes." She adds: "The real problem is for the person who is 50 and above."
With your stocks down 37% in a year, your dreams of early or even on-time retirement might be in jeopardy. So ask your advisers to crunch the numbers. Consider your budget and how much you're saving, Pareto says. Do you need to save more? Work longer? Live on less when you retire? When you have the facts, you can make an educated decision.
No one knows if the current market turmoil will last weeks, months, or years longer. The Fed's rate cuts failed to calm the financial markets on Oct. 8, and stocks slid lower again.
This sort of instability naturally causes some folks to panic, some to despair, and some to try to run away and hide altogether. But before you do anything impulsive, you might want to get some good advice first.