The last week of stock market drops has taken the S&P 500 into correction territory for the first time in two years. While still in an upward, bullish trend, the S&P 500 fell officially into correction territory on Thursday, down more than 10 percent from its record reached in January.
One theory about why the market may be correcting now is because of a fear that the economy is too strong and complacent. The fear is that this can lead to inflation, which may cause the fed to raise interest rates too high too quickly and cool down growth.
Another concern is that the yield chase over the last 8-years and the low interest rate environment have created an extremely risky situation for retirement income planning. The threat of higher interest rates creates uncertainty in the stock market as it can potentially make stock dividends less attractive. Remember, uncertainty causes volatility which can lead to sudden corrections in the markets.
An obvious lesson for investors during this bout of volatility is that periods of uninterrupted returns don't last. A correction is a normal part of investing. When markets correct, you can't control their length or severity, but you CAN control how you respond.
The recent dramatic pullback in stocks has created a buying opportunity if you follow the stock-buying theory of "buy-low, sell-high". I have no idea where the market goes next. It may continue into a longer-term correction or it might go back to its January highs. One thing is for sure, you had to put some money to work if you were smart enough to take some profits off the table at the end of 2017.
This brings me to an important point of enlightenment: if your Financial Advisor did not put at least some money to work in this correction – you need to FIRE HIM!
The job of a good "Financial Advisor", no matter what they call themselves: CFP, CHFC, etc., is to make sure that you are allocated properly and have money available to buy stocks when they go on sale. You are paying him to keep you calm and help prevent you from panicking and selling your investments at the wrong time. Furthermore, your advisor should have made sure you did not get greedy in this bull market and took steps to help you take some profits so that you had money to deploy when stocks got cheaper.
Understand that I do not endorse "market timing" which is specifically being "all in" or "all out" of the market at any given time. However, it is extremely important to have a methodology for buying and selling investments.
Also, if you are getting close to retirement or already in retirement, it is critically important to understand that avoiding major drawdowns in the market is the key to long-term investment success. The long-term results of avoiding periods of severe capital loss will outweigh missed short-term gains. Small adjustments can have a significant impact over the long run. The best money managers I know have always been adept at working around their positions by using a set of rules to help keep emotions out of the trading arena.
By the way, remember that risk questionnaire your advisor made you fill-out when you opened an account? How do you feel about that right now? How are you going to feel if we are in a declining market for several months?
Risk questionnaires are never going to give you the right answers you need to succeed in the financial markets. Your portfolio should always be constructed (and monitored closely) to deliver a rate of return sufficient to meet your long-term goals with as little risk as possible. Your appetite for risk will constantly change so you need to construct a set of rules to follow in any market environment to help you with that objective.
Unfortunately, most "Financial Advisors" only real job is gather assets to earn a residual fee. You would think that his services include "buying on the dips" but it doesn't unless you are one of his top clients. You see, he does not have time to gather assets and watch your account. There isn't enough time in the day (or he might be on one of his sales award trips he earned from capturing more of your money). The Financial Advisor's mantra is "buy and hold". This way, he can continue to make money from your account whether it is up or down.
If you are fortunate enough to get invited to investment house functions like dinners, golf outings and other events but you weren't important enough to put money to work during a fire-sale in the markets, then you are being cheated. You are the one paying for those lush dinners with the management fees you pay. However, you are paying for incompetence. You're paying for lackluster interest in your valuable assets.
Not only are you not getting attention to your WHOLE financial situation, you're not even getting the courtesy of going the extra mile with your portfolio that they manage. The very least you should expect is some attention to your account and some action to put money to work at opportune times. That is what you are paying them for, right? You can pay for plenty of your own dinners if your advisor is buying money on sale for you!
This week was a true test to determine the real value of your Financial Advisor. He should have prepared you to have money available to buy on the dips. He should have put some money to work during this correction. He should also make sure you keep some powder dry in case the market continues to drop.
The dips came, and you had the opportunity to buy stocks on sale. Did your financial advisor do that for you?
If he did, then make sure you hang on to that advisor! If not, there are only two words that make any sense at this point: