Do You Need a Financial Advisor?

Page 1 with the Question is here

The Answer:

Was your answer: "Nothing, because my portfolio is setup with a properly diversified allocation based on my risk tolerance and time frame, so all I have to do is re-balance it one a year."?

If so, and you know what everything in that sentence means. Congratulations, you are a calm, rational, educated investor. There is no need to pay someone to tell you what you already know unless you have some special circumstances in your personal finances.  We'll look into that later.

Was your answer ANYTHING ELSE AT ALL?

If so, then you need to seriously consider having a financial advisor or financial planner.

Emotions, Emotions, Emotions

They say real estate always comes down to the same three things: location, location, location.  In investing and financial planning it all comes down to three things: emotion, emotion, emotion.  You know a lot about personal finance.  You know a lot about money.  That doesn't mean that you don't buy the great coat you saw on sale even though your closet is packet with coats that are just fine.  Why?  Emotion.  You liked it better.  It felt nicer.  It went with your clothes better.  You were bummed out about break-up.  And so on, and so on.

There is a scene in the Bourne Supremacy movie where Abbot (Brian Cox) looks over at Pamela Landy (Joan Allen) and says:  "You talk about this stuff like you read it in a book."  What he means, of course, is that there is the academic world of books and magazines and spreadsheets, and there is the real world.  In the real world, things don't always go the same way that they do in a computer simulation.  What no spreadsheet, thesis, computer program, or internet calculator has never been able to calculate is human emotion.  Guess what?  Money is all about emotion, emotion, emotion.

Chances are you've nodded your head along while reading a book or web site about how you need to build a diversified portfolio. You might have used an Internet calculator to figure out what your allocation should be. Then, maybe you used Morningstar or other resources to pick the best no-load mutual funds with the lowest expenses. Just like they said.  Then, you told everyone how you didn't need an advisor because it is dumb to pay someone for what you can do yourself online. The only thing is, when you moved your money out of your REIT fund during 2007 you sold low. When you put that money into your five-star international fund because it was doing so well, you bought high.  It's supposed to be the other way around.

You tried to time the market. You didn't call it that of course. Moving out of bonds when the Fed raises rates is smart. Getting out of REITs when the housing market goes down just makes good sense. And, now, whatever you are doing to avoid the recession (probably moving to higher quality dividend paying stocks) is just you being savvy enough to manage your own money.

Only, it isn't savvy.  It isn't what you read about in that book, magazine, or website.  It isn't what you told yourself you would do when you decided that you were a long-term, smart, buy-and-hold, do-it-yourself, invstor.

It is market timing. Just re-phrase the statements above and you'll see market timing, market timing, market timing.

Selling REITs because the housing market is slumping = REITs will go down, so I will sell first (trying to sell before something happens is market timing).  Too bad they are already down -- if you re-balanced at the end of 2006 you would have sold before they started going down -- if you sold in mid-2007 they were already down over 20%.

Moving out of bonds when the Fed raises rates (prices of bonds move in the opposite direction of rates) = bond prices are going down in the future, I'm going to sell first.

And now, today, moving to high quality dividend paying stocks because they won't be hurt as much in the recession = non-dividend paying stocks are going to go down in the future so I'm going to sell before they do.

Ok, that's the quick version.  At Finance Gourmet we aren't about quick versions we're about the details and the inside information.  Keep reading to get it.