By Warren Buffett, the legendary investor, once imparted his wisdom by saying, “The first rule of an investment is don’t lose money. And the second rule of an investment is don’t forget the first rule. And that’s all the rules there are.” These words hold great significance in the world of finance and serve as a guiding principle for investors. While it may be impossible for financial advisers to always abide by this rule, as market fluctuations are unavoidable, it begs the question: How do you determine when it’s time to cut your losses?
Analyzing Relative Returns
A helpful rule of thumb is to compare the relative returns of your investment portfolio to a similar target portfolio over the same time frame. This approach can provide insight into whether your losses are within reasonable bounds. Tiffany Lam-Balfour, an investing spokesperson for NerdWallet, suggests, “If you have a portfolio with 60% in stocks and 40% in bonds, compare it to a similar portfolio.”
Seeking a Second Opinion
In situations where losses occur, seeking a second opinion from another financial adviser can provide valuable perspective. Lam-Balfour advises, “Some brokerage firms may include a target portfolio as part of their statement, or a financial adviser can likely include it in a client’s portfolio review.” This external evaluation can prove essential in making informed decisions.
Choosing the Right Benchmark
For benchmarking purposes, the S&P 500 is a popular choice. However, due to the diverse nature of portfolios, it may be necessary to calculate a weighted average using one or more indices. Lam-Balfour explains, “If your portfolio consists of 60% stocks and 40% bonds, you might assign a 60% weight to the S&P 500 and 40% to the Barclays Aggregate bond index or a similar benchmark. This approach provides a more accurate reflection of your actual portfolio.”
In conclusion, while losing money can never be completely avoided in the world of investments, following Buffett’s golden rule should always be front of mind. By comparing relative returns, seeking second opinions, and selecting appropriate benchmarks, investors can better navigate the unpredictable financial landscape.
Evaluating Your Financial Adviser
If you find that you are consistently underperforming the market, it’s important to question your adviser and evaluate the situation. Arielle Jacobs-Bittoni, a certified financial planner at Refresh Investments, suggests seeking a second opinion to determine if your current investments align with your goals. In fact, you can even use a tool to find a new financial adviser who better suits your needs.
Consider whether your adviser invested according to your goals and expectations. It is crucial to have a clear understanding and realistic expectations to avoid any surprises. If your adviser placed you in a portfolio with excessive risk that doesn’t align with your profile, it may be time to consider switching advisers.
Losing money does not necessarily mean you should immediately dismiss your adviser. Luis Strohmeier, a certified financial planner at Octavia Wealth Advisors, reminds us that advisers do not control market fluctuations. Instead of solely focusing on losses, it’s more important to evaluate the overall performance in relation to the market. If an adviser can help minimize losses during a market decline, it can be seen as a positive outcome.
Lastly, ensure that your chosen financial adviser is not only an advocate but also acts as a fiduciary for you. They should not judge your lifestyle choices but must understand and support your goals. Compatibility and mutual respect are essential in this working relationship.
Remember, finding the right financial adviser is crucial for your financial well-being. If you need assistance in finding a new adviser, there are tools available to match you with professionals who may meet your needs.
Comments