Long Term Financial Security: The Value Of Working With The Pros
During the life of this column, I have often recommended the use of financial advisors to help map out your plans for long term financial security. This perspective is particularly applicable to todays financial marketplace as we are once again at a crossroads which requires some decisions in managing our personal finances going forward. A brief review of the financial markets performance over the last two years will underscore the importance of considering professional advice at this juncture.
The stock market lost nearly half of its value in the period from January 2008 to March of 2009. This move was particularly devastating to retirees or those near retirement, and to families with large college savings plan balances who were close to needing those funds. The retirees saw their dreams go up in smoke, and the families needing to draw on the college funds were equally as devastated. Many people were panicked by the drop, and they reacted by liquidating their holdings and converting to the safety of cash. The problem is that cash holdings were suffering at the same time from the Feds action of bringing interest rates down to near zero levels.
Therefore, if you jumped out of the market and into cash at the market lows, you had roughly one half of your capital remaining earning little more than one to two percent interest. If you held this posture until today, the interest rates are still as low as or lower than 18 months ago, and the stock market has regained all of its losses, sitting now at the pre-crash January 2008 levels. This is a very difficult position to be in for both retirees and college bound families, as well as many others, who tried their best to preserve their hard earned money.
How could this scenario have had a different outcome? Many financial advisors recommended rebalancing portfolios during this tumultuous period, but few advised total liquidation of equities for cash. Therefore, many who sought and used the professional advice were spared the total devastation suffered by those whose decisions were driven by emotion. Therein lays the value of the professional financial advisor. Do they always hit home runs? Do they pick market tops and market bottoms? Do they guarantee your financial success simply by following their advice? The answer to each of these questions is a resounding NO!
However, what they do provide is a non emotional evaluation of your current situation, a review of your longer term needs and goals, a thorough overview of current market conditions, and a resultant allocation of your investment capital that is based upon financial models and experience. So for example, instead of simply selling everything and waiting to see what happens next, they hold stocks with the best possibility of weathering the storm, liquidate stocks with the least likely potential for the foreseeable future, and keep some cash in reserve to add positions as opportunity arises. The result is that while you may not have garnered all of the gains represented by the market recovery, you would have shown much better results than if you had panicked and moved 100% to cash.
Furthermore, the professional investment advisor looks at the whole picture surrounding your financial well being. This includes life insurance, long term care coverage, and alternative investments where appropriate. This approach best serves the goal of financial planning and not simply that of investing.
In my opinion, you select a financial advisor based upon his access to many different resources in evaluating investment alternatives, and his track record in applying those resources. Ask questions and make sure you feel comfortable with the answers. Both his approach and his track record should be made available to you as you consider using his services. Looking at the financial markets as of this writing, stocks are closing in on their highs, interest rates remain at historic lows, economic indicators remain mixed, and the level of uncertainty going forward is as high as it has ever been. All of these factors underscore the need for professional advice. Your credit union offers the services of BCU investment advisors, which I have used personally, and many banks and brokerages provide similar services. You work hard for your money; make it work hard for you!
Life. Money. You is a trademark of BCU.
©Patrick J. Catania 2012
The views and opinions expressed herein are solely those of the author and do not necessarily reflect those of Baxter Credit Union, its Board of Directors, or its employees. The author is responsible for the content. Readers should consult with, and seek professional advice from their own attorneys, accountants, and financial advisors with respect to their individual financial needs and circumstances.
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