How a Financial Advisor Can Help During an Economic Downturn
Financial advisors can provide you with expert advice and suggestions that can help you plan your financial future with ease. They can assist you with your investments, retirement planning, estate planning, succession planning, as well as saving for your child’s higher education costs in the future. Financial advisors wear many hats and their role is indispensable specially during an economic crisis. When the economy suffers, unemployment increases, and the returns from various accounts and funds show losses, a financial advisor can provide relief in many ways.
What is an economic downturn?
An economic downturn can be defined as a time when the economy slows down. During this phase, the country’s gross domestic product (GDP) falls and the returns from investments begin to drop. An economic downturn can occur for a number of reasons and can affect the country and the global economy at large. This can be a stressful time for investors as they begin to see their invested money incurring losses. However, a financial advisor can be of considerable help here.
Here is how a financial advisor can be useful during an economic downturn:
- A financial advisor can help you devise a plan of action
- A financial advisor can help you maintain liquidity
- A financial advisor can rebalance your portfolio
- A financial advisor can help you focus on the long-term
- A financial advisor can track your progress
An economic downturn can have far reaching consequences. You could lose your job, experience losses in business or suffer in terms of investment returns. All of this can lead to increased debt in the form of loans and credit card dues. Despite having an emergency fund, the repercussions of economic volatility can weigh you down easily. You may even have to withdraw funds from your retirement accounts. However having said that, economic downturns are a part of the economic cycle. Whether it was the Dot.com Bubble in the late 1990s or the Great Recession in 2008, the market is susceptible to changes every now and then. A financial advisor can help you decide the next course of action when the economy starts to show signs of recession. Right from building your savings, to claiming unemployment benefits, to finding ways to minimize losses and maximize returns by optimally diversifying your portfolio, financial advisors can offer better approaches to tackle an unfavorable economic situation.
The one thing that can make a significant difference in an economic downturn is your level of financial liquidity. While everyone talks about the importance of having an emergency fund, not everyone knows how or where to keep their money. Financial advisors can help you plan your savings in accounts that facilitate easy access. Most people save funds in their bank accounts, but this does not allow your money to grow with time. Financial advisors can recommend superior options, such as money market accounts, certificate of deposits (CDs), etc. These accounts offer higher returns while maintaining ease of accessibility. This allows you to not only save for a contingency but also appreciate your net worth in the process.
Rebalancing typically means to bring your portfolio back to what it was when you started investing. This means that if you started with a 60:40 ratio of stocks and bonds in your portfolio but are now at a 50:50 composition, you need to rebalance your portfolio to bring it back to 60:40. An economic downturn is an ideal time to rebalance your portfolio. This can involve buying and selling of stocks and adjusting your risk appetite to align with your existing needs.
Moreover, even in an economic downturn, some investments can perform better than others. A financial advisor can suggest to you new investments and let go of the ones that no longer seem fruitful, given the state of the market. Such decisions can be challenging to take on your own. Besides, the lack of complete knowledge of how the market functions or how a fund is likely to react in the future can lead to rash choices. All of this coupled with stress and fear, can wreak havoc on your portfolio. A financial advisor can provide you unbiased professional advice and help you rebalance your portfolio to suit your current requirements, risk capacity, and goals.
Investments usually differ as per your goals. Goals are divided into three broad categories – short-term, mid-term, and long-term. Although you may know the difference between each of these, when your investments begin to show a downward trend, you are likely to panic and start selling. It is hard to look at the bigger picture and comprehend that not all short-term volatility is bound to negatively affect your future goals, such as retirement. Instead of panic selling, a financial advisor can bring in a better perspective of which of your investments need to be sold at a given time and which are expected to outgrow the market downturn to ultimately provide gains.
The aftermath of an economic downturn can last for many years. You could accumulate debt during a recession or sell off some assets to accommodate your expenses. However, what matters more is to make up for these short-term losses over time. Apart from curtailing the damage in the present, a financial advisor can help you track your goals in the coming years as well. They can ensure that you keep a budget in place and follow it through to slowly get your finances in order. They can also help you prioritize your expenditure to avoid taking on more debt and repay all existing loans on time to reduce defaults that can lower your credit score.
When the market begins to show signs of recovery, a financial advisor can also recommend the right investments that may assure you considerable gains. All of these things ensure that you are well prepared for any economic slowdowns that may surface in the future.
To sum it up
Consulting with a financial advisor has many benefits. While an economic downturn may seem like the only time when you may need one, it is better to work with an advisor from the very start. This will ensure that your invested money is safe and protected regardless of how the market functions. Moreover, having a financial advisor can allow you to take prompt action the moment things start to go downhill. This saves crucial time in a crisis.
To know more about how to steer out of an economic downturn, you can reach out to Financial Advisors in your area.
