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Beware of General Financial Advice During a Crisis
All good financial advisors value and respect each of their clients, striving to understand them and seeking opportunities on their behalf whenever possible. They inquire about their clients’ lives, asking questions to clarify important details and paying close attention to everything they say.
This is hardly a secret formula, but when advisors do these things, they have their clients’ trust when they need it the most: during a crisis.
Keep in mind that each client is different; nine times out of 10, part of our message during a downturn is the same: Don’t panic.
But from there, we tend to counsel those with cash on the sidelines to go bargain hunting while valuations are down. Very often, clients heed this advice, so when the crisis fades, their portfolios have recovered and their goals remain well within reach.
Bad Advice
Of course, there’s always someone who wants to get out of the markets entirely. So, I was not surprised when a client called recently, sick to his stomach about what the recent market sell-off and economic slump had done to his portfolio, even suggesting that he should “go to all cash until everything calms down.”
What continues to surprise me, though, is when I have conversations like this, clients frequently cite something they’ve read online to support their argument.
I don’t know how anyone can blindly say that fleeing to a portfolio that includes only money market cash is a good strategy.
Maybe some pundits genuinely believe that, or perhaps they are just in search of clicks and views.
Either way, because no two investors have the same combination of goals, tax obligations, salaries, savings, career prospects, real estate holdings or health concerns, blanket recommendations such as these are not helpful – especially during a time like this.
To put a finer point on it, were an investor to retreat to cash each time there’s a dip in the markets, it could be the difference between retiring comfortably and not being able to retire at all. Indeed, that turns the adage of “buy low and sell high” on its head.
So yes, while general advice like “draw up a budget” or “limit debt” can be helpful, most, thanks to the differences listed above, need more targeted guidance.
Vast Differences, Similar Approaches
To illustrate this point, let’s think about two investors. One is a 37-year-old man. He is single, healthy and makes a more than respectable $90,000 annual salary.
While the good news is that he’s debt-free, the bad news is that he’s just getting started on saving for retirement, having built only a modest portfolio to go with a small 401(k). Complicating matters, he’s about to get married and plans to have at least a couple of children.
The other is a wealthy, 75-year-old widow. She’s retired and though she remains in relatively good health, she does contend with a series of medical issues as she ages.
She draws income each month from an investment portfolio that’s worth more than $10,000,000. At the same time, she wants to preserve it so she can leave large inheritances for her children and grandchildren.
It’s clear that these two do not have the same financial considerations. But even as we don’t know everything about them, what’s equally apparent is that a cash-only portfolio will do nothing to help either reach their stated goals.
Are there people who may need to depart the markets and take what they have off the table during the pandemic? Yes. The sad fact is that the job losses and economic damage have been astounding.
But many others, like the two investors above, can afford either to remain committed to their present investment strategy or possibly get even more aggressive as the current environment creates buying opportunities.
Be Cautious With General Statements
Be cautious with statements and articles you read online before acting on your portfolio. The next time you come across someone online recommending a drastic action, sleep on it. Reflect to make sure you have control over your emotions, and then call your advisor to talk it out.
