Let’s face it, not everybody can be a portfolio manager. Investors are often too busy developing their career or running their business to manage their investment portfolio on a day-to-day basis. Instead, they might turn to a financial advisor who has the expertise and market knowledge required to manage their assets.

Bringing a financial advisor onboard doesn’t mean an investor can step back entirely. No matter how trustworthy and knowledgeable the advisor may be, placing blind faith in one can be a dangerous thing. Investors must take an active role in the financial planning process, and help set and monitor a strategy that plans for all visible contingencies.

Building Trust and Setting Goals

Finances typically rank among the most important considerations in people’s lives, and rightfully so, given that their finances dictate everything from their current lifestyle and their children’s futures to their retirement security. A financial advisor’s role is to grow the investor’s wealth while managing risk prudently and appropriately.

In order to do so, investors must clearly define their financial goals, and timeframes. This is the cornerstone of investment strategy and the first step of the financial planning process. Investors have a large part to play as well. They must save, and develop their talents so they can move up the ladder and make more over time, and keep expenses minimized at every opportunity.

Once the goals are defined and a path is laid out the advisor’s strategy makes recommendations that fit the client. This strategy sets the path and criteria for the investor’s trust in the advisor.

Understanding Misinformation Risk™

Within the financial industry, there are a number of common edicts that are actually myths based on misinformation. These include the notions that investors should remain invested in the market at all times, that cash never keeps up with inflation, and that it is impossible to beat the market. Regardless of experience, a financial advisor may parrot these teachings with or without recognizing their fallacies.

If an investor blindly accepts everything an advisor tells them, the result could be a strategy built on a foundation of false information. Due to the amount of fundamentally flawed information that is guiding many investment decisions, acting on misinformation tends to put an investor’s money at much greater risk than was originally understood or anticipated. This is what Squire Asset Management refers to as Misinformation Risk™. Investors must take it upon themselves to question critically and to research the advice they are given before taking action.

Our articles on Misinformation that pervade things like the investment industry’s foundational strategies to operational tactics (or sometimes lack thereof) are highly informative, and necessary reading.

The Importance of Strategy

The core of financial planning is this: Strategy.

Consider this. The current volatility of the market may signal a longer period of instability to come, similar historically to what was experienced between 1896 and 1945 when the market crashed by nearly 40 percent on eight separate occasions. Now consider that most of today’s financial advisors weren’t investing during that time period and that their experience is of an upward market trajectory.

How might that impact their predictions?

Think about the fact that the most commonly used index for historical information is the S&P500 which misses 30 years of that information, 6 Major crashes and 4 other very significant declines. Some forget it’s not always easy and upward sloping.

If an investor forgoes planning for a market crash because their financial advisor assures them that the market will bounce back quickly (because in the advisor’s experience it always has), the investor could lose not only a lot of money, half or more, but also their retirement lifestyle if there is not enough time to come back. Planning for the worst is safer than trusting always in “the best.”

This is why Squire’s “Blue Ocean” type strategy employs thoughtful risk management, planning for market crashes by defining when to get in and out of markets. Investors need to take an active interest in the development of their portfolio, and ensure that a sound strategy lies at the heart of the financial planning process.

There are two distinct market environments. One smooth upward sloping and the other more flat and extremely volatile. Both have lasted 50 and 60 years historically. We wonder if some advisors and therefore clients are stuck in the former environment, investing with outdated tools when the latter is at hand.

Because in a stock market crash, strategy might trump trust only. YOU have to have both.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.

It is not possible to determine the top or the bottom of the market.

Investing in the market involves risk, including fluctuating prices and the uncertainty of return. No strategy assures success or protects against loss.

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