If you’re a “do it yourself” investor, review this check list (below). If you’ve entrusted your investments to an advisor, there’s no guarantee he or she may not be committing some of these avoidable errors!
Error #10 – The left hand doesn’t see what the right hand is doing.
Splitting up your money amongst various managers “to see who does best” is a terrible idea. “Joanne” has a $3 million portfolio divided amongst 3 managers. One manager takes a very conservative tack, while another manager uses a Wild West approach. How does Joanne decide who’s doing a better job for her – the advisor taking less risk or the advisor who’s betting the farm?
Error #9 – Your portfolio is riddled with overlapping holdings
You may have a host of mutual funds with appealing names but do you know if your portfolio well-diversified? Or is it missing whole asset classes? I’ve seen portfolios that consisted almost exclusively of large US stocks. What about US mid/small cap companies? International and emerging market stocks? Bonds? Real estate?
Error #8 – You or your advisor “timed” the market (and got it wrong)
They say timing is everything – if only is could be predicted! “Harold” had a $1 million investment account that he said was “dead in the water.” A quick look at his portfolio revealed that his advisor sold half of his portfolio in 2008 (at the bottom of the market) and left it sitting in cash ever since! Harold simply didn’t notice this, and his advisor didn’t tell him. This leads to Error #7: buying high, selling low.
Error #7 – Buying High, Selling Low
Whether you invest yourself – or your advisor invests for you – avoid following the herd . Examples abound of investors who traded 15% rates of return each year for a meager 2-3% by hopping in and out of positions in order to “time” the investment. Staying the course is the best option.
Error #5 – If it’s too good to be true, it is
This speaks for itself. The only true investment “free lunch” is the benefit of asset allocation diversification. Forget the promises of great returns and magic feats of performance. Don’t repeat the mistake Madoff investors made.
Error #6 – Too many eggs in one basket.
Remember Enron? Employees loaded themselves to the gills with employer stock and it all vanished in a puff of smoke. Your employer stock can tank like any other investment. If your broker only pays attention to what he or she is managing (and invoicing for) – and not your 401k plan –this problem could go undetected for a long, long time.
Error #5 – Understand exactly how much your investments cost
Jill’s entire $2 million portfolio consists of “C” mutual fund shares. Jill thought she was being charged a 1% management fee only but the advisor was getting an additional 1% per year via “C” share commissions. A shares in particular extract a heavy initial commission fee (up to 5.75% per year). No wonder A, B and C shares are popular with brokers.
Error #4 – Buy wholesale, not retail
In the investment world, this means investing in more low cost index funds and avoiding expensive, actively managed funds with 1-3% annual fees, including fees you pay to help the mutual fund market its fund to others! Expense is a big predictor of net investment performance.
Error #3 – Looking in the rear view mirror
Chasing past performance – be it a fund, stock or asset class – is no guarantee of future performance. Reversion to the mean suggests something that did relatively well in the past will “revert to the mean” and be a relative underperformer in the future.
Error #2 – Ignoring the types of investments that go into taxable vs. tax-deferred accounts
This is a classic mistake. Municipal bonds, stocks and tax-advantaged equity mutual funds flourish in taxable (after-tax) accounts. Ordinary bonds, real estate, commodities and tax-inefficient positions belong in tax-deferred accounts. Taking after-tax money and sticking it into a tax-deferred variable annuity is a disastrous example of unwittingly taking money you already paid taxes on and paying future ordinary taxes on it AGAIN.
Error #1 – Is your portfolio consistent with your risk tolerance and future financial planning needs?
A Certified Financial Planner (preferably fee-only) can tell you if your portfolio is structured to fund your future financial needs.
© Copyright, 2015. Eve Kaplan. All Rights Reserved.