This is the second post in the 8-part “Taking Stock Of Your Financial Advisor” series, focused on the dynamic relationship between high-net-worth investors and their advisors. “Taking Stock Of Your Financial Advisor” is sponsored by OppenheimerFunds. See more posts in the series ».
Portfolio construction can be overwhelming and the temptation to chase strategies that ‘promise’ to beat the market is ever present. But it’s important for investors to determine their financial goals and understand just how to go about constructing a portfolio that can help them get to those goals.
Here are a few key factors that investors should check-off when speaking to their advisors about their portfolio.
What are my financial goals?
Many people, with good reason, worry about outliving their savings. Some investors also need to factor in relatives that are less well-off that they might need to help. Investors often keep mum about health concerns in the family or the financial condition of relatives. But this can be a crucial detail for advisors, not only because they can help curb unnecessary spending and keep clients on track to meet their goals, but also because they can step in and tell them just how much they can realistically allocate to relatives without overextending themselves.
Another crucial aspect of assessing financial goals is understanding when you might need money. If an investor needs money in the near-term they might have to opt for more liquid assets. This could also subject investments to short-term volatility.
What about asset allocation and diversification?
Greenhorn investment strategies like age equals asset allocation, where investors use their age to determine the per cent of their portfolios to keep in stocks, have been eschewed. Instead, investors should ask their advisors about a whole host of assets including stocks, both domestic and international, fixed income, real estate, cash, commodities, and alternative investments and determine what per cent of their portfolio they want to allocate to their chosen assets. The idea is that each of the assets serves a different purpose.
The portfolio could include Treasury Inflation Protected Securities (TIPS) to protect against inflation. A focus on fixed income could be warranted if investors are concerned with regular income. Typically an investor will load up on stocks if they are chasing higher returns, but this carries a higher risk. The reason advisors recommend diversification is that each of these assets will respond to market moving events differently and help reduce risk.
During each of these stages it is important for an investor to keep asking how much risk is right for them and how much they can take on.
Finally, investors should stay flexible and consider rebalancing their portfolio as needed. This isn’t to say that every market move warrants a rebalancing, but it is something they should keep an eye on.