The Value of Financial Advice During Volatile Markets

Stock markets are volatile. They always have been and always will be uncertain. A high is followed by a lull, and your returns will see a range of waves before you redeem your money at maturity. Some volatility is normal and expected, as in the case of equity funds. Equity or stocks are known to be risky and are susceptible to market fluctuations. However, there are several other factors that induce volatility. For example, sometimes, internal issues and losses of a big company can impact the whole sector. Political events, pandemics, natural disasters, wars, etc., can also cause volatility. So, it may be right to believe that market volatility is out of your control. No matter what you do or where you invest your money, you will likely bear the brunt of a volatile market at some time in your life. Luckily, the value of good financial advice cannot be undermined in these situations. Financial advisors can be helpful in lowering the impact of market volatility on your investment portfolio and help you navigate your way through. If you wish to build a diversified investment portfolio that can weather market fluctuations, reach out to a professional financial advisor who can advise you on the same.

Read on to find out more about how financial advisors can be beneficial during volatile markets.

What do financial advisors do?

Financial advisors are expert professionals who guide clients on a number of financial matters. A financial advisor can help you with issues of financial planning, retirement planning, tax planning, estate planning, and more. Essentially, financial advisors help you understand where, how, and how much to invest so you can reach your financial goals without any delays. Financial advisors can help you figure out how to boost your savings and implement a budget. They also help with debt management. Financial advisors can help experienced investors as well as beginners. Moreover, they can be hired at any age or phase of life.

When do I need a financial advisor?

1. When you are starting out with investments:

If you are new to investing your money and need help figuring out where to start, you can consider hiring a financial advisor. Investing your money can be intimidating when you are new. You may need help understanding suitable investment instruments for your risk appetite or how much to invest. You may also need help with understanding and evaluating your goals. Further, portfolio diversification is also important to ensure your risk is managed and returns are maximized. A financial advisor can help with all of these things and help you step into the world of investing.

2. If you are struggling with debt: 

Debt management is a major concern. High-interest debt can impact your savings and investment rate and make it hard to plan for the future. The sooner you get rid of it, the better it can be. However, the easy availability of debt can sometimes come in the way of your judgment. A classic example of this can be the use of credit cards. While credit cards can have certain advantages, they are also highly risky for your financial health. The cycle of interest continues to interfere with your finances, and you end up saving less than you spend. In such a situation, a financial advisor can help.

3. If you plan to start a family:

Starting a family is a significant decision, both personally and financially. You need to account for the child’s expenses, such as medical and education costs, food, clothes, etc. All of this will require you to save more and invest in the child’s future. A financial advisor can help you create the right strategy that helps with this.

4. For a range of financial planning services such as retirement, estate, investment planning, etc.:

You may have several financial goals at different stages of your life, such as retirement planning, estate planning, investment planning, and more. Each of these goals requires a distinct strategy and plan. A financial advisor can help with all of these and more. They can help you choose the right instruments for retirement savings, invest in instruments according to your risk appetite, and create an estate plan that is tax-friendly, in line with your wishes, and legally coherent.

Do I need a financial advisor to invest during volatile markets?

Depending on your goals, you may need a financial advisor at every market cycle. But the need for them is further amplified during volatile markets. Volatile markets create an emotional atmosphere for most investors. The sudden drop in returns can result in panic, and you may be tempted to exit the market or make rash decisions that can harm you in the long run. This is when you need to leverage the value of a financial advisor.

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A financial advisor can help you in the following ways:

1. The advisor can guide you on how to handle a volatile market:

Consulting with a financial advisor is essential when things seem to go south. A number of factors can cause market volatility. Some may have grave consequences, while others may pass in due time without affecting your long-term plans. It is essential to understand what is happening and why it is happening. This will help you comprehend the situation better and keep your stress under control. Talking to a financial advisor can be educational and allows you to be better equipped to handle financial uncertainty.

In addition to this, the advisor can also help you keep negativity outside investing. Emotions like fear and anxiety can influence your decisions. Instead of being impulsive, it is essential to be practical and think of the future. A lot of investors exit the market in a state of panic. This only worsens the situation further. However, you can gain from the value of a financial advisor and make decisions based on knowledge rather than fear.

2. The advisor can help you keep a long-term perspective: 

If you talk to a financial advisor, one of the first things they will ask you to do is keep a long-term perspective. A long-term view can be extremely helpful in investing. It is practically impossible to time the market. This is why it is often advised to focus on your time spent in the market rather than timing the market. Hence, ignore the noise and concentrate on the long-term goals you outlined for yourself when you started investing. Moreover, long-term investing helps your money stay invested in the market so it can grow. The highs and lows of short-term investing are eliminated, and your investments eventually bounce back. Further, long-term investment offers the power of compounding. If you invest in instruments, such as mutual funds, through the power of compounding you can reinvest your profits along with the principal interest back into the market so you can earn a higher reward.

Long-term investments are also more tax-friendly as the tax charged is relatively low. Long-term capital gains tax can be more attractive than short-term capital gains tax, which is added to your gross income for the year and taxed accordingly. Moreover, it removes the burden of saving at a later stage in your life. So, the first piece of advice an advisor is likely to offer you is not to exit the market no matter what and to stay invested for the long term as you initially set out to be.

3. An advisor can help you stay focused on your financial plan:

Even when the market changes, your plans do not have to. It is essential to stay focused on your plan. For instance, if you are saving for your child’s education and your child is still a toddler, make sure that you focus on the ultimate goal and do not steer from it. In this case, you will have adequate time to recover till your child is grown up and ready to use the money. A market drop is not always detrimental to your growth. If you are just starting your career, you would have several years to make up for any loss made during a market lull. However, if you are retiring right now or in the near future, a market downturn at the same time can be concerning. So, make sure you think of your goal and adjust your strategy accordingly, not the other way around.

4. An advisor can assist you in diversifying your investment portfolio:

If you are wondering how do financial advisors invest your money, the answer is diversification. Diversification is a critical component of investing. It essentially means not putting all your eggs in one basket. Instead, you can explore different sectors, instruments, markets, etc. This distributes your risk in multiple assets and does not let it concentrate on one. Even during a market downturn, some companies and assets may perform better than others. If your portfolio is well-diversified, you will be able to curtail some of the damage. The value of an advisor lies in the way they create a diversified portfolio for you that leads you out of volatile market cycles. They may recommend keeping a blend of multiple asset classes, such as equity, debt, real estate, etc. Additionally, they may also recommend defensive assets like debentures, bonds, bank bills, and bank deposits.

How to evaluate a financial advisor

The value of a financial advisor can be fully realized if you select the right professional for your affairs. Choosing an advisor from a pool of options may be confusing, especially if you are hiring someone for the first time. The following tips can help:

1. Discuss the advisor’s fees and compensation:

Different financial advisors have different fee modules. Some may charge by the hour, others through commission. Some also charge on a monthly basis. You can select any of these options. However, before you do so, make sure you understand what you are paying for. Hiring a financial advisor is an investment and not an expense. However, it is important to establish some fee transparency since you are spending your hard-earned money.

2. Understand their financial services:

There are different types of financial advisors. You can hire tax experts, retirement planning experts, fiduciaries, wealth managers, etc. Make sure you know the services a professional offers and hire one suitable for your needs. It helps to inform the professional about the things you are looking for and understand how the advisor fits into your plan. Additionally, it may also be recommended to hire a fiduciary as these individuals are legally liable for the advice they give. They are bound to act in your favor by law, and so the trust factor is enhanced.

3. Check their educational qualifications and licenses:

Financial advisors may have qualifications like Certified Financial Planner (CFP), Chartered Financial Consultant (ChFC), etc. In addition to this, financial advisors also need the General Securities Representative license or the Series 7.1. There is another license known as the Series 63 license or the Uniform Securities Agent State license. Other than this, the financial advisor needs to register with the Financial Industry Regulatory Authority (FINRA) and the Securities and Exchange Commission (SEC). Ensure that you hire a qualified financial advisor after vetting his credentials and checking if any complaints have been lodged against him.

4. Check their feedback and roster of clients:

The internet can be a great place to verify the authenticity and caliber of people. You can check feedback from other clients to get an idea of how qualified and professional the advisor is. You can also get in touch with other clients, if possible, to get more information on the advisor’s acumen and expertise.

To conclude

The critical thing to remember in a volatile market is that no matter what, it shall pass. Market cycles come and go and are beyond your control. However, keeping a long-term strategy and relying on the advice of a professional financial advisor helps. So, instead of panicking and making the wrong decisions, try to be patient and calm. Stay focused on your long-term plan, and do not let go of it.

If you have yet to hire a financial advisor, now may be a good time to get in touch with one. Use the free advisor match service to match with 1-3 vetted financial advisors that can help you with your unique financial needs and goals.