Questions to Ask Your Investment Manager

Market volatility and economic uncertainty can be unsettling. Rather than worrying, talk to your investment manager. He or she can answer your questions and allay concerns you may have about your portfolio and investing approach.

LEARN MORE: "The Benefits of a Strategic Asset Allocation Program" explains the process and considerations involved in implementing a successful, diversified asset allocation strategy. LEARN MORE: Also, listen as John Skjervem, Northern Trust's chief investment officer for Personal Financial Services, discusses the benefits of a well-diversified portfolio in the "Strategic Asset Allocation" podcast.

Recent turbulence on Wall Street, volatility in global markets and a stall in U.S. economic activity can be unsettling and make you doubt your resolve. To put your mind at ease and ensure your portfolio is positioned to weather turbulence, you and your investment manager may want to discuss some of these issues and strategies.

If the current market environment has shifted my portfolio enough to adversely affect my ability to reach my long-term goals, what should I do about it?
This question gives you and your investment manager the opportunity to assess your current asset allocation strategy and how your weighting in the various asset classes may have shifted due to recent market events. More than likely, your investment manager has already explored with you your expectations, goals and comfort level with risk, and has used these as the basis for your current asset allocation strategy.

Using detailed modeling based on historical returns, your investment manager can project the statistical probability that your portfolio will generate returns in line with your long-term financial goals. If your current portfolio balance has gone down, your investment manager can estimate the likelihood that the balance will recover and whether it will affect your ability to achieve your long-term goals.

For shorter-term goals, however, you and your investment manager may need to discuss whether you feel comfortable accepting more risk in pursuit of potentially higher returns, or if you may need to adjust the timing on achieving those goals. The outcome of these collaborative decisions is a shared responsibility between you and your investment manager.

If I’m feeling uncomfortable with the potential short-term losses I could face in this market environment, should I adjust my asset allocation?
Bear markets often make investors realize they overestimated their willingness to accept the fluctuations in value that accompany many higher-risk investments. If you are feeling uncomfortable with the market fluctuations, you and your investment manager may want to reassess your appetite for risk and the appropriateness of your asset allocation strategy.

However, you also want to take care not to overreact to the market’s short-term volatility. Equities often perform well during a recession. The Standard & Poor’s 500 Index (S&P 500) has, on average, gained 10% during the previous nine post-war recessions.

How might the current U.S. economic slowdown affect my investment portfolio one, three and five years from now, and should I be looking at shifting assets into different classes, at least temporarily?
The Federal Reserve began 2008 by dramatically cutting its targeted Fed funds and discount rates in an attempt to bolster a weakening economy. The change included the Fed’s first emergency ease since 2001 and its largest single cut since the early 1980s. The timing and size of the one move — the Fed typically acts in smaller “bites” and advertises its intentions beforehand — surprised many in the U.S. and global markets with its aggressiveness. But it still created concerns about whether the central bank can pull the economy from the brink of recession, relieve stress across international markets and restore confidence. Your investment manager can help you assess how this may affect your portfolio in the short term.

Should I be concerned about a recession in the U.S. economy?
Investors have become even edgier about the possibility the economic slowdown really is an unacknowledged election-year recession. Early this year, indications suggested the credit markets were mending and additional monetary and election-year fiscal stimulus would be forthcoming. We expect a first-quarter stall followed by slowly improving growth of about 2%, enough to drive corporate profits to approximately 5% or 6% by year-end.

However, even if the U.S. economy does prove to be headed into a recession, you may want to discuss with your investment advisor some of the indications that this downturn will not be severe, and certainly not worth abandoning your long-term investment plan.

The global economic situation leading up to this recession — if this proves to be a recession — is much stronger than we’ve seen leading up to previous recessionary periods in the United States. Before this downturn, the world economy was in the midst of the best period of global output since the early 1970s. The global business cycle for the past five years was marked by significant, above-trend growth driven by global liquidity and accompanied by very strong savings rates in developing markets, which were the primary growth-drivers.

And while the U.S. economy has suffered some shocks from the housing and subprime mortgage markets, many economists believe we are nearing the bottom of the housing sector problems. Likewise, the inflation in crude oil prices — breaking $100 a barrel in 2007 — hasn’t had the same effect on the U.S. economy as it would have in the past thanks to a decrease in the amount of oil needed to generate $1 of gross domestic income.

Because of these economic strengths heading into this downturn, the economic fallout will not be as harsh or last as long as many fear.

Should I be worried about inflation and position my portfolio differently to protect against that possibility?
It’s important to discuss your inflation concerns with your investment manager and agree on inflation assumptions. From here, you can work together to determine how to position your portfolio to address that risk.

The U.S. dollar has swooned to record lows against other major currencies and shows few signs of staging a lasting recovery anytime soon. Given the deteriorating effect the falling dollar has on your portfolio and the unknowns that still loom, such as from China and its yuan, you may wonder if you can ameliorate that risk without abandoning dollar-denominated assets. Commodities such as gold and oil tend to move opposite the dollar and gain ground during inflationary periods. Adding commodities exposure to your portfolio is one potential way to help mitigate the risk of inflation.

Also bear in mind that while a weak U.S. dollar can increase the cost of living and drive up inflation, it also can benefit companies that export goods and services, as well as those with global operations. You and your investment advisor may want to discuss how this may come into play in your portfolio.

How can I evaluate the potential riskiness of alternative investments, such as real estate, hedge funds and private equity?
With regulators, legislators and the companies themselves still trying to assess and address the subprime fallout, many investors are casting a nervous eye at their portfolios, wondering what might come next. The subprime mortgage debacle and its unexpected domino effect on so many firms and individuals unearthed a number of vulnerabilities in the financial innovation arena. The widespread shocks, including the recent ones linked to rogue traders, are ones that few people ever imagined or financial models suggested. Asking questions to increase your comfort level with any investment — traditional or innovative — is important.

As with any investment, alternative investments offer potential advantages as well as unique risks. Because these investments historically have not responded to economic events in the same way as equities or fixed income, they provide valuable diversification benefits to a portfolio.

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