Take some time to learn about the stock market crashes / corrections that have happened over the past few decades. Discuss these patterns with your advisor. Where do the markets sit relative to past booms and busts? What are bear and bull markets? What is a bubble? Are we in a period of unprecedented market gains?
Some financial advisors may take this memo as an attack, but it is not one. Most financial advisors suggest stocks, bonds and insurance products. There is definitely room for those within a diversified investment plan. But, in my opinion, to truly diversify, you need assets out of the “markets” to hedge against losses there. You also need your financial advisor to incorporate hedges within your stock, bond and insurance market investments. Remember that stocks, bonds and insurance products can be used to hedge each other as well.
A quick side note. I highly recommend that your CPA or income tax preparer is not also your financial advisor. These two disciplines require full time focus and someone cannot be a full-time professional tax advisor and financial advisor, just as a plumber cannot be an electrician. Your CPA should be used to help you independently evaluate proposals from your financial advisor, especially to accurately project the net tax consequences. We review investment proposals from advisors everyday.
The stock market has rallied in the past few years like never before.
Along with this though, I have seen some blindness to the potential impact of a correction in the stock market.
A stock market crash is when a stock index drops severely in a day or two of trading, let’s say more than 10%. The indexes are the Dow Jones Industrial Average, the S&P 500, and the NASDAQ.
A crash is more sudden than a stock market correction. A correction is when the market falls 10 percent from its 52-week high over days, weeks, or even months. Each of the bull markets in the last 40 years has had a correction. It’s a natural part of the market cycle that wise investors welcome. Such a pullback allows the market to consolidate before going toward higher highs. No one welcomes a crash. It is sudden, violent, and unexpected.
I am urging all of my clients to call their financial advisors, and their plan administrators for their retirement plans, and ask them this question:
“If the stock market had a significant downturn, or we entered a bear market, how do you have me positioned to hedge against this? Both within the markets (stocks, bonds, insurance) and with assets outside the markets?”
If a plan is in place to protect you against a market crash or correction, it should be provided fairly quickly.
For example, go over all of your holdings and review with your financial advisor the potentiality of an impact on each of those if there is a market crash or correction. These eventualities should be a part of the planning they have done for you. Ask them for the worst case scenario.
If you are told to “not worry about it” and the markets over time always go up, that should alarm you.
Again, is there any planning that they have specifically implemented to hedge against a significant market downturn? Is part of this plan assets outside the “markets?”
We all love the stock market gains that we have seen the past few years. But without proper planning, many of these can be wiped out in a very short time.
Along with this, you want to make sure that you diversify your investments. If you are 100% invested in the stock, bond or insurance markets, regardless of the level of risk, your investments may not be diversified enough.
Please consider investing some of your portfolio in hard assets as well such as real estate, commodities, precious metals etc., along with your assets invested in the stock and bond markets. Also, your financial advisor may have hard asset funds available to them you can choose.
The stock market can be a good place to invest some of your assets if done properly, but we need to also hold assets out of that world in order to truly diversify and hedge against the losses there.
Have you ever had your financial advisor’s plans and strategies independently reviewed by a CPA for accurate tax consequences?
Please reach out to me without hesitation with any tax, business or accounting question, and to schedule a consultation.
“If We Aren’t Working For You, Then You Aren’t Working At Your Best”
Chris Whalen, CPA
79 Oak Hill Road
Red Bank, NJ 07701