Warren Buffett’s first rule of investing and what to do if an advisor breaks it
Warren Buffett once said: “The first rule of investing is not to lose [money]. And the second rule of investing is to remember the first rule. And that’s all the rules that exist. Of course, your financial advisor won’t always be able to follow this rule – the markets go down and no one beats the market every time, even Buffett himself – but when they lose you money, how do you know when to pull the plug? (You can use this tool to be matched with a planner that meets your needs.)
A good rule of thumb when seeing losses in your portfolio: “Comparing the relative returns of your investment portfolio to a similar target portfolio, over the same time period, can help you see if your losses are irrelevant. If you have a portfolio with 60% stocks and 40% bonds, compare it to a similar portfolio, ”says Tiffany Lam-Balfour, spokesperson for NerdWallet. You may also want to consider getting a second opinion from another advisor. “Some brokerage firms may include a target portfolio in their statement or a financial advisor can likely include it in reviewing a client’s portfolio,” explains Lam-Balfour. Additionally, you can use a benchmark index like the S&P 500, but you will likely need to do a weighted average of one or more indices, as a diversified portfolio will not be 100% invested in the S&P 500. “If your portfolio is found at 60% stocks and 40% bonds, you can calculate a weight of 60% for the S&P 500 and 40% for the Barclays Aggregate bond index or something like that to get a more accurate representation of your actual portfolio Explains Lam-Balfour.
If you consistently underperform the market, Lam-Balfour recommends asking your advisor why and see if the explanation makes sense. “You might also want to get a second opinion to see if your current investments are appropriate for your goals and if you should be going in a different direction,” says Lam-Balfour.
It is also essential that you consider whether your advisor has invested according to your goals and expectations. “What is important is that customers have a clear understanding and expectations so that they are not caught off guard. If an advisor inappropriately invests a client in too risky a portfolio that does not match their profile, then I suggest they consider switching advisers, ”says Arielle Jacobs-Bittoni, Certified Financial Planner at Refresh Investments.
Also, remember that losing money is not always a deciding factor. Luis Strohmeier, certified financial planner at Octavia Wealth Advisors, notes that advisers do not control fluctuations in the market, so it’s difficult to judge their performance based solely on losses. “If the market is down 30% and your advisor loses you 10%, maybe I would be happy if he didn’t lose me another 20%,” Strohmeier says. And, he adds, make sure your advisor is an attorney and a trustee for you. “They don’t have to judge your lifestyle, but they have to understand it. If it’s important to you, it should be to them and they should find ways to help you achieve your goals, ”says Strohmeier.