If you are a novice when it comes to investing, then a good advisor will get you started on the right track by first helping you to define what your investment objectives are-or should be.
For example, if you are a very risk-averse person, your advisor may explain to you that your current portfolio is subject to inflationary risk.
He or she would probably recommend that you move at least a portion of your money into some form of equities or equity mutual funds in order to grow your money over time.
Or you may have all of your money in stocks when you’re about to retire.
In this case, your advisor would most likely tell you to move a portion of your money into more conservative holdings so that you are not taking so much market risk.
This is because you may not have time to make up for large losses if the markets experience a severe correction.
A good advisor can also help you to determine exactly which types of risk you should be taking with your money, as well as how much of each type.
There are several different types of investment risk, and every type of investment is subject to one or more of these risks.
There is no such thing as a truly risk-free investment.
Investments that guarantee your principal and pay a guaranteed rate of interest may be viewed as “safe”, but your purchasing power will usually erode over time due to the effects of inflation.
A good financial advisor will also help you to determine the appropriate time horizon for your money.
A general rule of thumb that most advisors counsel their clients to use is to have at least three to six months of income saved in a liquid account such as a money market fund.
This fund can be used to pay for unexpected expenses or to carry you through a period of unemployment.
This is essentially short-term money.
Then your advisor can help you to determine the correct asset mix for your retirement savings based on your risk tolerance and time horizon.
If you don’t want to risk your money in the markets but still want to earn higher returns that guaranteed instruments pay, then an indexed annuity may be what you’re looking for.
Your advisor can help you to find the best possible product in the marketplace and thus save you a great deal of time and research.