An advisor has the perspective to look at your investment portfolio mix in relation to your goals, time horizon, and risk tolerance. “If your circumstances and goals haven’t changed, your allocation probably shouldn’t either,” said Tony Giordano, a financial planner with Vanguard Personal Advisor Services®.

“An advisor can tell you whether you’re still on track to meet your financial goals. If you’re not on track, your advisor can discuss options to get back on track. Just as your car requires regular maintenance, so does your portfolio, especially during a market downturn,” he said.

You’re more than just your asset balance

You are at the center of your financial plan: your goals (both short- and long-term), your situation, your financial strengths and challenges. An advisor looks holistically at all of these things before making any portfolio recommendations.

“A crucial part of the process is getting to know how each client pictures life in the future,” said Giordano.

It starts with an inventory of your financial situation. “An advisor needs to know what you have to work with and what financial obligations you have to meet. Those are your assets—things like your salary, home or car if you own them, and your savings and investment—and your liabilities—common ones are credit card payments, student loans, mortgages, and car payments,” said Giordano.

A common way an advisor obtains this information is via an online survey you complete.

Next, it’s time to sort out which goal to tackle first. If you’re like most of us, you have several financial goals you want to achieve, but only a certain amount of money to put to work accomplishing them. An advisor can help you prioritize how to dole out the income you have.

“It’s really about using the knowledge acquired during conversations with you to work through which of your goals it makes the most sense to focus on,” said Giordano.

Your needs drive your asset mix

Only after learning about your goals, interests, and financial situation does an advisor start the portfolio-building process, in consultation with you.

“It’s all about setting a prudent asset allocation—that’s the percentage of stock and bond investments in your portfolio—based on how long you have until you expect to draw on your invested assets and your risk comfort level,” said Giordano.

Key considerations an advisor looks at include how your portfolio could be affected under different market scenarios and whether you’ll have enough in assets to cover your projected spending needs in retirement.

“We perform modeling to see how your portfolio would hold up under different market stresses, along with sensitivity analysis that evaluates how various withdrawal percentages may impact your portfolio’s ability to last through your life in retirement,” said Giordano.

Smart steps can minimize your tax burden

Tax savvy comes into play when building your portfolio.

“Your current tax situation, as well as the one you expect to be in when you draw on your invested assets, play a role in determining what types of accounts make the most sense to use—along with what types of investments to hold in them,” said Giordano. “That practice is called asset location. For example, locating tax-efficient investments, such as municipal bonds or index funds, in tax-efficient accounts, such as your 401(k) or IRA, may not be optimal from a tax perspective.”

Sensitivity to tax implications also applies for periodic withdrawals you’ll take once you retire. “Withdrawals should be consistent with your asset allocation strategy, drawing from whichever asset class is overweighted at the time,” said Giordano.

An advisor’s expertise can help coordinate your portfolio withdrawals to maximize tax efficiency. “We may redirect dividends to your checking or savings account or a money market fund for liquidity,” Giordano said.

Low costs help too

Another area of focus is costs. Every dollar you spend in investing costs is one you don’t have available to actually invest. Even a few percentage points can add up over the long term.

“No one can control what happens in the markets,” said Giordano, “But you can control how much you pay to invest. Selecting low-cost, high-quality, well-diversified funds is one way an advisor can help you ensure you’re putting the biggest amount of your investing dollars to work for you.”

Discipline can make the difference

An advisor serves as a coach during times when the markets are triggering a desire to change from the disciplined course that stands the best chance of long-term success.

“It’s human nature to want to avoid pain. That’s why good coaching can make the difference,” said Giordano. “Everyone needs someone with the perspective to help them maintain focus when the going gets tough.”

With investing, that time is often during market downturns when the desire to just do something can kick in. But what action is the one that will get you closer to your goal?

“One thing I remind my clients is that you don’t get returns in investing without risk. And sometimes risk may lead to short-term losses,” said Giordano. “But over time, maintaining discipline to the right strategy generally achieves results. For example, if you changed your 50% stock/50% bond allocation to 100% bonds when Lehman Brothers declared bankruptcy in 2008, you’d have earned a 25% return through March 31, 2015. Not too shabby. But had you maintained discipline and stuck to that 50/50 allocation, you would have realized a 59% return during the same period.”

A balanced, diversified investor has fared relatively well
Balanced, diversified investor chart

Source: S&P 500 Index and Barclays Capital US Aggregate Bond Index (rebalanced monthly). 100% Cash represented by 3mo T-Bill, 100% Bond represented by Barclays Capital US Aggregate Bond Index. Data provided by Factset and Vanguard calculations.

The key is confirming your strategy is still relevant for your situation. If it is, an advisor can support you through challenging periods, as a coach does with an athlete, so you can still advance toward your long-term goals.

Notes:
All investing is subject to risk, including the possible loss of the money you invest.

Be aware that fluctuations in the financial markets and other factors may cause declines in the value of your account.

There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income.

Advisory services are provided by Vanguard Advisers, Inc. (VAI), a registered investment advisor.