Warren Buffett once said, “The first rule of an investment is don’t lose [money]. And the second rule of an investment is don’t forget the first rule. And that’s all the rules there are.” Of course, your financial adviser isn’t always going to be able to follow that rule — the markets do go down, and nobody beats the market every time, even Buffett himself — but when they do lose you money, how do you know when to pull the plug? (You can use this tool to get matched with a planner who meets your needs.)
One good rule of thumb when you see 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 out of line. If you have a portfolio with 60% in stocks and 40% in bonds, compare it to a similar portfolio,” says Tiffany Lam-Balfour, investing spokesperson for NerdWallet. You can also consider getting a second opinion from another adviser. “Some brokerage firms may include a target portfolio as part of their statement or a financial adviser can likely include it in a client’s portfolio review,” says Lam-Balfour. Additionally, you can use a benchmark like the S&P 500 but you will likely need to do a weighted average of one or more indices because a diversified portfolio will not be 100% invested in the S&P 500. “If your portfolio happens to be 60% stock and 40% bonds, you might calculate a 60% weight to the S&P 500 and 40% to the Barclays Aggregate bond index or something like that to get a more accurate representation of your actual portfolio,” says Lam-Balfour.
If you’re consistently underperforming the market, Lam-Balfour recommends asking your adviser why and seeing if the explanation makes sense. “You may also want to seek a second opinion to check if your current investments are appropriate for your goals and whether you should go in a different direction,” says Lam-Balfour.
It’s also key that you consider whether your adviser invested according to your goals and expectations. “What’s important is that clients have a clear understanding and expectation so they are not caught off guard. If an adviser inappropriately invests a client in a portfolio with too much risk that does not align with their profile, then I would suggest they think about switching advisers,” says Arielle Jacobs-Bittoni, certified financial planner at Refresh Investments.
Remember, too, that losing money isn’t always a dealbreaker. Luis Strohmeier, certified financial planner at Octavia Wealth Advisors, notes that advisers don’t control market fluctuations, so it’s difficult to judge their performance based solely on losses alone. “If the market is down 30% and your adviser loses you 10%, I might be happy that the adviser didn’t lose me an additional 20%,” says Strohmeier. And, he adds, make sure your adviser is an advocate and a fiduciary for you. “They don’t have to judge your lifestyle, but they do have to understand it. If it’s important to you, it should be important to them and they should find ways to help support your goals,” says Strohmeier.