The one thing we know about investing and financial planning is that conventional wisdom rarely applies. Case in point: you might think that the ongoing series of controversies surrounding the White House and Congress, Russian meddling, and the situation in North Korea would mean that the stock market will soon decline, and rapidly. The truth, though, is that headline news—even of the cataclysmic variety—historically often has less of an impact on investment markets than you might expect. The reality is reasonable minds disagree and no one knows when, or why, this current bull market will end.
The good news: presently, corporate earnings are enjoying strong growth across the globe. The Conference Board Leading Economic Index for the United States is pointing up, and interest rates remain at historically low levels. Based on these measures, one could think this bull stock market will continue for years. However, the pessimist might argue that this is the second-longest bull market in history. U.S. stocks and bonds look fully valued to expensive based on many historical measures. The trailing price-to-earnings ratio of the Standard & Poor’s 500 index is in the 24 range versus a historical average of 16. Other valuation measures, such as the Shiller PE Ratio, also find current valuations entering very elevated zones.
And, as noted above, while interest rates are at historically low levels, this also implies that bond prices are at historically high levels. Based on these facts, it is not unreasonable to ask if we are closer to the end of this bull market than we are to the beginning. Qualified wealth managers and financial planners can help clients navigate through these confusing and varying market landscapes.
Regardless of how the next bear market might play out, effective investment advisers can be critical when markets turn ugly, seeking to protect your money in downturns by helping you make good decisions during difficult times. This does not mean you will not experience a drop in your account value. If you invest in stocks, real estate, and private equity, you will almost certainly see losses.
Stick to a plan.
If a drop in the stock market causes your net worth to sink, are your long-term financial plans at risk? In most cases, no. Focus on the end goal. Advisers help you develop contingency plans in the event of bear markets so that you can focus on long-term objectives and not the day-to-day gyrations of the market.
Keep enough cash.
Do you have enough cash and income to meet your monthly expenses without having to sell stocks, real estate, or other assets that may drop in value for months? The long-term prospects for an investment portfolio can be compromised when investors, in need of cash to manage their routine expenses, are forced to liquidate investments at reduced prices during these bear markets.
Diversify your portfolio.
Advisers can help you assess how diversification fits into your portfolio needs. If U.S. stocks are expensive, do you own international stocks or other assets that may be better valued? Do you have bonds, stable value funds, or cash in your portfolio? Bonds have been much maligned given where interest rates reside, but in most bear markets, bonds are your friend.
Need an adviser? Here are some things to consider.
Credentials: There exists a confusing alphabet soup of credentials in the financial industry including: CFP (Certified Financial Planner), CFA (Chartered Financial Analyst), CIMA (Certified Investment Management Analyst), and CPWA (Certified Private Wealth Advisor). These designations are not interchangeable, and it would be beneficial to understand the differences between them when selecting an adviser. Although there are many exceptions, traditionally a CFP, CIMA, or CPWA is focused on financial planning-related work, while someone with a CFA is more investment-focused.
Experience: When seeking to manage a long-term portfolio that could likely see many periods of fluctuation in the market, experience is key. A 10-year adviser has lived through the crash of 2008, a 17-year adviser has lived through two major downturns, and a 30-year adviser has lived during five sell-offs of more than 19 percent. Investing with a mature and experienced advisory team provides you with practical insights gleaned from experiences that newer teams have not had.
Fiduciary Standard: There are two standards of work in the investment advisory profession, a fiduciary standard and a suitability standard. A fiduciary must hold their client’s interests above their own and disclose any conflicts of interest. The suitability standard is less stringent. An investment professional under a suitability standard must have a reasonable basis to believe that an investment or investment strategy is “suitable” based on the investor’s investment profile. The suitability standard does not require an adviser to hold a client’s interest above their own. Ask any potential adviser which standard they are held to.
Compensation and Fees: Fees should be transparent and reasonable. Advisers can be compensated in several ways: fees paid directly from the client, fees paid by the investment product provider, or commission. Firms can also create revenue by receiving referral fees from insurance agents or other professionals. There are fee-only advisers and fee-and-commission advisers. Neither compensation method is inherently wrong. Just consider any potential conflicts your adviser may have based on their business model.
In summary, the good news is that in the long-term stock market investments have historically paid off. Maintain sufficient liquidity, truly diversify your portfolio, and try not to make rash decisions. If you are not comfortable doing this by yourself, consider hiring an adviser. Worthy advisers can help you make prudent financial decisions, moderate emotionally driven actions, and keep you on course as you seek to achieve your long-term monetary goals.
Mark McClanahan, a managing director at RGT Wealth Advisors, is a Certified Financial Planner and a Chartered Financial Consultant. He is a past president and chairman of the Financial Planning Association of Dallas/Fort Worth.