As we all know, and have known for years, it is important for clients to have adequate diversification in their investment portfolios.
But if ever there was a time to be sure that investors portfolios remain in line with their risk tolerance, its now, when the stock market is volatile and uncertainty about its future direction continues.
A good financial advisor can be an investors most valuable asset in all market conditions, but especially in markets with wide swings, such as exist today. It is critically important for clients to have their risk profiles reassessed to ensure they have adequate diversification among mutual funds, insurance products, and other savings vehicles.
As a financial advisor, your advice and knowledge will be greatly sought during this choppy economic period. Expect to field questions such as, “Should I move money out of the markets and into an annuity?” or, “If I do that, and the market roars back, am I going to miss out?”
To help you address such issues with clients, it may be useful to keep in mind the following ideas related to “passive investing,” or investing in products that replicate an equity market index. The benefits of such products include lower management fees, lower risk, and greater tax efficiencies than can be found in actively managed portfolios.
As you know, properly diversified investment choices can help smooth out the bad times and protect for the future. Over the years, more and more consumers have apparently come to agree with that. As a result, there has been a great proliferation of assets tied to financial indices, such as those at my own company, Standard & Poors.
Why? Investing in an index-linked product, such as an index fund or an exchange-traded fund, is one way of getting diversified exposure to a market with a relatively low cost, tax efficient investment. This is passive investing. Today, more than $1 trillion is passively managed this way to S&P indices.
Insurance products linked to an index are also thriving. In fact, 94% of equity indexed products are tied to the S&P 500, our U.S. large cap equity index.