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"Information is an investor's biggest ally."
If we were to give you just one piece of financial advice, it would be this - "Ask Questions."
With inflation at its highest in 40 years, uncertainty clouding the global markets, and a high volatility index - it's high time you review your financial plans to secure your future.
Just like you visit your GP for an annual health screening, you need to check in with your financial advisor at least once a year to refine and optimize your investment goals and portfolio to match your life stage and changing needs.
A financial advisor should help you select investments that align with your financial goals.
For example, at my firm, Covenant Wealth Advisors, we offer a free retirement assessment that provides a thorough analysis of your portfolio. This can be especially helpful if you are looking for a second opinion.
This survey will connect you with a vetted fiduciary financial advisors at Covenant Wealth Advisors. We provide your survey responses to your matched advisor, which help them understand your financial goals.
We've encountered many individuals who could have avoided making the wrong decisions if they had asked the right financial planning questions.
It doesn't matter whether you're new to financial planning or have been investing for several years; it's never too late or too early to start asking questions about your portfolio.
Remember, there are no wrong or dumb questions. After all, it's your hard-earned money that you're investing. So, don't feel intimidated or shy to ask questions to your financial advisor about your portfolio.
An informed client is an asset and not a liability.
SPECIAL NOTE FOR INDIVIDUALS AGED 50+ WITH OVER $1 MILLION: Tying your $1 million+ portfolio to your retirement and tax plan can be hard. If you are interested in learning how to optimize your portfolio, click here for a free retirement assessment.
The best financial advisors welcome and encourage their clients to ask questions, no matter how basic.
In this post, we share a list of questions to ask your financial advisor about your portfolio. Print out this list or bookmark this page so you can refer to it later. Make sure to take a pen and notepad to your meeting with your financial advisor. Take note of their answers so you can discuss them later if needed.
Key Questions To Ask Your Financial Advisor About Your Portfolio
1. What rate of return do I need to ensure my money will last in retirement?
Everyone has varying income needs in retirement. While some prefer taking it easy after decades of hustling, others view retirement as a golden opportunity to give wings to their encore careers. Retirement planning takes time and research and needs to be reviewed periodically to keep up with changing market conditions and lifestyle requirements.
Checking the performance and returns of your retirement plans with your advisor can help you identify its weak points and make the necessary changes to keep them solid and steady over the years. Factors like age, when and where you wish to retire, and what you want to do in your golden years determine your " perfect retirement number."
To know whether you're on track to reach your retirement goals, you can ask your financial advisor to provide you with a report of three things:
The overall money you have saved in your retirement and non-retirement accounts
How long will that money last you in retirement, factoring in pensions, annuities, social security, taxes, healthcare, and other sources of income, if any
If there is a shortfall or surplus based on your current investments and return projections
This can help you get a clear picture of your current standing regarding retirement so that you can ramp up contributions or make changes to your investment portfolios in case of a shortfall.
Finally, once you know the return you need to target for your money to last based upon your lifestyle, you can adjust your portfolio accordingly to help improve the likelihood of accomplishing that return long-term. Ultimately, this may help you to avoid taking on more risk than necessary to accomplish the goals that are important to you.
2. How much should I allocate toward stocks and bonds?
When investing your money, one of the first (and crucial) decisions you'll make is deciding how to divide your portfolio between bonds and stocks. Like with other investment decisions, there is no single answer that suits all investors. The right mix depends on age, experience level, risk appetite, investment philosophy, and the target return you are pursuing on your money.
Your financial advisor analyzes all these factors to identify the right proportion of stocks and bonds to include in your portfolio.
For instance, the advisor might suggest an ultra-aggressive or moderately-aggressive allocation strategy if you're a young earner with a long-term investment plan. On the contrary, as you approach retirement, your goal changes from growing returns to building a steady income. In this phase of life, the advisor might suggest you allocate a bigger portion of your wealth to bonds that may help you preserve your capital and a smaller percentage to stocks to allow some room for growth.
SPECIAL NOTE FOR INDIVIDUALS AGED 50+ WITH OVER $1 MILLION: Tying your $1 million+ portfolio to your retirement and tax plan can be hard. If you are interested in learning how to optimize your portfolio, click here for a free retirement assessment.
And don't be fooled by what you read in the media, bonds still play a major role in maintaining preservation for your portfolio as outlined in our bond investing guide.
3. How much should I allocate toward U.S. and international stocks?
Investing in international stocks through mutual funds or exchange-traded funds is an excellent way to diversify your portfolio.
The biggest advantage of investing in global markets outside the U.S. is that these markets do not rise and fall simultaneously as domestic markets, potentially helping you soften the blow if and when the domestic markets take a hit.
This brings us to the pressing question - how much of your funds should you allocate to foreign investments?
A good place to start may be to look at current market cap weights of different international stock markets.
Global stock market capitalization is the total global value of all stocks traded on public exchanges. It has become a very important indicator for individuals investors.
For example, the chart below shows the percentage of money invested in stocks across different global stock markets:
Understanding global stock market weights can help you better determine how much you should allocate your investments toward U.S. and non U.S. companies.
Asking this question to your financial advisor helps you evaluate if your portfolio has a properly balanced exposure to international investments across Europe, Asia, and emerging markets.
Vanguard recommends that between 20 to 40% of your stock exposure be invested in global stocks, though that number varies depending on your risk appetite, age, and other factors.
Ultimately, the answer may depend on the length of your investment horizon, risk profile, and your comfort with investing in non U.S. companies in the first place.
4. Am I taking on too much risk?
Your risk appetite depends on age, life stage, and investment goals.
The more you're willing to take risks, the higher your potential returns (and losses). Everyone wants great returns, but if you can't tolerate the ups and downs of the market, you may never achieve the returns you need to make your money last.
Your financial advisor should help you identify how much risk you can handle and build an optimized portfolio that matches your risk appetite.
Stock markets can be volatile and understanding how much risk you should take is one thing, but knowing how much risk you can actually tolerate is another.
The chart below illustrates this point by showing the intra year declines of the S&P 500 index every year since January 2nd, 1980. Each decline is represented by the red dot on the chart.
As you can see, markets fall temporarily every year and you may not be comfortable with losing nearly half your portfolio (2008), especially in retirement.
One tool that can help you analyze your appetite for risk is a risk assessment questionnaire. Most financial advisors will use a risk assessment as a starting point to help guide you.
5. Should I follow an active or passive management approach?
Active investing requires you to take a more hands-on approach to your investments, watching the market and trying strategies to beat average returns by taking advantage of short-term price fluctuations. That said, active investing is not suitable for all - as it requires you to dedicate more time to monitor your investments.
The truth is, we're not big fans of active investing because there is not much evidence to support it long-term. If you want to learn more, you can read our article on how to invest in retirement.
SPECIAL NOTE FOR INDIVIDUALS AGED 50+ WITH OVER $1 MILLION: Tying your $1 million+ portfolio to your retirement and tax plan can be hard. If you are interested in learning how to optimize your portfolio, click here for a free retirement assessment.
Passive investing, on the other hand, is about letting markets work for you long-term. Passive investors generally don't believe that stock markets can be timed or that it's possible to accurately select winning stocks consistently. Instead, passive investing focuses on what you can control such as diversification, keeping costs low, and tax efficiency. This method limits the amount of buying and selling happening in your portfolio, making it incredibly cost-effective and potentially more profitable in the long run.
This, arguably, more disciplined and hands-off approach may allow you and your your financial advisor to better handle the big questions around retirement, taxes, and getting the most out of life with your existing resources.
6. How much am I paying to manage my investments?
You need to ensure that the advisor's fees are feasible so that it's not eating into your returns. Financial advisors are compensated in one of the following ways: fee-only, commissions, or a combination of both. Fee-only advisors are becoming increasingly popular as they are more transparent, charge no hidden fees, and have no or reduced conflicts of interest to sell or push a particular investment product or company to earn commissions.
Don't feel uncomfortable discussing the fees with your advisor. Most advisors expect clients to ask this question, and they would be able to give you an answer easily so that you can decide if you can afford their services.
7. How often do you implement tax-loss harvesting in my portfolio?
It's impossible for any financial advisor - amateur or seasoned professional - to avoid losses altogether. What differentiates the pros is that they take proactive measures to turn lemons into lemonade when your portfolio is down.
Example 1:
Martha invests $1 million with her financial advisor. One year later, a recession hits and her investment holdings are down $100,000 or 10%. While both Martha and her financial advisor believe the market decline is temporary, her advisor wants to take advantage of the losses for tax purposes. As a result, he sells her investments, thus realizing a loss on paper of $100,000, and immediately reinvest the cash into similar investments (but not substantially similar). Six month later, her portfolio rebounds back to $1 million, but Martha now has a $100,000 loss that she can use to partially offset future capital gains on her tax return.
8. How much can I withdraw from my portfolio in retirement on an annual basis?
You've worked hard for years to save for a comfortable retirement. Now, it's time to reap the benefits of your hard work and diligence. If you spend too much early on, you risk being left with nothing in your later years. On the other hand, spending too little could leave you with no room to enjoy your retirement as you planned.
That said, the golden standard of retirement income - the 4% withdrawal strategy might not work for everyone. Ask your financial advisor to create a customized withdrawal strategy that helps you enjoy your golden years in comfort without worrying about running out of money.
9. Which accounts should I withdraw from first in retirement?
The optimal order for withdrawing from different accounts varies for each person. Before you decide which accounts to draw from, you must learn how to make the most of your asset types.
Work with your financial advisor to understand your accounts and assets and decide the proper order of withdrawals that extend the longevity of your portfolio and lower your tax bills.
The traditional rule of thumb of withdrawing from taxable accounts first, then tax deferred, then tax free accounts is rarely the best strategy in real life. Depending on your financial goals and strategies, your financial planner might suggest a combination of withdrawals from taxable brokerage accounts, traditional IRA, 401(k), and Roth IRA.
10. How can I reduce capital gains taxes on my portfolio?
It's easy to get so caught up in maximizing your investment returns that you forget the tax consequences - especially the capital gains tax.
Remember that any profits you make on your investments reach you only after tax deductions. Figuring out the right tax strategy is crucial to getting the maximum out of your assets.
SPECIAL NOTE FOR INDIVIDUALS AGED 50+ WITH OVER $1 MILLION: Tying your $1 million+ portfolio to your retirement and tax plan can be hard. If you are interested in learning how to optimize your portfolio, click here for a free retirement assessment.
The taxes you pay will depend on your income. This means that it's important to understand your taxable income when making tax decisions on your portfolio.
Work with your financial advisor to reduce capital gains taxes by using tax-advantaged retirement accounts like traditional IRA, Roth IRA, etc., investing for the long-term to reduce realizing gains unnecessarily, and offsetting capital gains with capital losses.
The best financial advisors should be able to speak to you confidently on how to reduce capital gains taxes on your portfolio.
If your financial advisor doesn't look at your tax return and provide fully integrating tax planning strategies, give them the boot. There are better advisors out there.
11. How much can my portfolio potentially fall during a bad stock market?
All investors live with the risk of a bad stock market. It has happened before, and it will happen again. Asking this question helps you evaluate if the amount of risk you are taking is commensurate with what you can sleep with when markets get volatile.
After all, we all want great returns but if you can't tolerate the ride, you'll likely jump off the wagon before you reach your destination.
Our founder and financial advisor, Katherine Fonville, was interviewed by Financial Advisor IQ about this exact question. Be sure that your financial advisor frames the answer both in dollar terms and percentages.
Why?
Because a $100,000 loss can seem a lot different than a 10% loss. It's all a matter of semantics and it's a good exercise to walk through to make sure you are prepared for future volatility within your portfolio.
As you can see below, the hypothetical portfolio with 100% stocks performs the best long-term. But, it also experiences the most volatility during times of stress.
Preparation and diversification are the two key weapons that help you weather a bad economic hurricane. Check if your financial advisor has a contingency plan to protect your portfolio from these major events.
Be a Smart & Informed Investor
Building the right portfolio starts with asking the right questions to your financial advisors. When it comes to growing and protecting your wealth and assets, there is no "one-size-fits-all" approach. The key is finding trusted financial advisors who can pinpoint your blind spots and help create a tailored financial strategy that works best for you.
When asking these questions, let your financial advisor know you're taking notes. Write down the answers shared by the investment professional so that if something goes wrong down the line, you can refer to your notes to establish what was said and done. The best financial advisors will send you a follow up email after your meeting outlining the conversation to help save you time. Holding regular and consistent dialogues about your portfolio with the advisor helps spot issues early and take proactive measures to minimize negative impacts.
When it comes to long-term planning for retirement, the earlier you spot and eliminate problems, the greater the potential for a safer and bigger retirement nest egg.
Our team of financial planners and fiduciary investment advisories at Covenant Wealth Advisors are specialized in retirement planning and portfolio management leading up to and through retirement. We can help you maximize your wealth to ensure you retire on your terms, paying as little taxes as possible.
Need help getting building a better portfolio that helps manage risk, reduce taxes, and improve your expected returns?
Our financial advisors can help you answer your most important portfolio questions. Talk to a financial advisor today.
About Mark Fonville, CFP®
Mark is a fee-only financial advisor at Covenant Wealth Advisors specializing in retirement income planning, investing, and tax planning for people aged 50 plus.
Forbes nominated Mark as a Best-In-State Wealth Advisor* and he has been featured in the New York Times, Barron's, Forbes, and Kiplinger Magazine.
Disclosures:
Covenant Wealth Advisors is a registered investment advisor with offices in Richmond and Williamsburg, VA. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital.
The views and opinions expressed in this content are as of the date of the posting, are subject to change based on market and other conditions. This content contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.
Please note that nothing in this content should be construed as an offer to sell or the solicitation of an offer to purchase an interest in any security or separate account. Nothing is intended to be, and you should not consider anything to be, investment, accounting, tax, or legal advice. If you would like accounting, tax, or legal advice, you should consult with your own accountants or attorneys regarding your individual circumstances and needs. No advice may be rendered by Covenant Wealth Advisors unless a client service agreement is in place.