Are You Making These Investment Portfolio Mistakes

Are You Making These Investment Portfolio Mistakes?

As a financial professional, I literally get to look at hundreds of portfolios belonging to people from all walks of life. You get carte blanche access to individuals and couples at different stages of their lives, at varying income levels, and with various social and educational backgrounds. In the process, these portfolio mistakes show up on a regular basis, no matter what the person’s age, occupation, or other demographics.

The mistake I find to be most typical involves portfolio overlap (often referred to as lack of diversification). It doesn’t happen because people haven’t been told not to put all their eggs in one basket, but rather because no one ever tells them how diversification really works. Simply put, holding seven or 10 different mutual funds in different asset classes such as large cap, mid cap, and international doesn’t ensure the portfolio is diversified. What many investors don’t realize is that two, three, or even five different mutual funds can all be investing in the same companies.

The “stock intersection” tool on does a great job of illustrating this. It shows, for example, that two popular 401(k) investments – the American Funds Growth Fund of America and Dodge & Cox Stock Fund – own at least 10 of the same companies’ stock, including Wells Fargo, Comcast, Microsoft, Merck, Home Depot, and Dow Chemical to name a few..
The overlap problem can be compounded when couples build their individual portfolios without considering how the other spouse’s asset allocations may overlap their own. Generally speaking, I suggest that couples consider their assets as one pool and employ a single approach to investing instead of doing the same things in two different plans. Overlap can become problematic during market downturns because similar holdings fall in sync rather than balance each other out. Obviously, the same can happen when things turn positive (and that would be a good thing) but from a risk management perspective, investors need to be aware that the number of holdings alone, even in varying asset classes, may not be providing adequate diversification.

I’m always surprised at the number of people who think investing in their 401(k) is free, or that their IRA account at a brokerage firm costs only $35 or $40 annually. Too many investors don’t realize that they may be out thousands of dollars to unnecessary or excessive fees each year simply because they aren’t taking into account the impact it can have on their returns.
Company retirement plans are not free, regardless of whether it’s a 401(k) or 403(b). In fact, some plans are downright ridiculously expensive. Investors need to treat an investment like any other important purchase. Most people would never buy the first car they saw or make an offer on the first house their realtor shows them without first considering other options and trade-offs.
When it comes to IRAs and other investments, the same holds true.

The third and most disheartening portfolio mistake people make is the lack of attention they give to their portfolio. You can tell when someone hasn’t adjusted their asset allocation in 10 years or has blindly allowed a company to change plans and used default investments as a result. Investors need to understand that Peter Lynch doesn’t run the Fidelity Magellan Fund anymore, and if they’re less than five years from retirement, their portfolio should resemble their age and wisdom, not the ambitions they had five or 10 years ago.

No one is asking you to be a financial guru or to devote 10 hours a week to your investments, but you should have a process for regularly reviewing your goals, results, diversification, expenses, and investment options based on both your current situation and your projected retirement date. It’s more about knowing which questions to ask and what to avoid rather than trying to time the market or always picking the most successful investments.

Not having a tactical strategy. When the train is coming are you able to get off the tracks?
A tactical approach allows you to get off the tracks let the train pass and then get back on the tracks after the train has passed.
Tactical allocation is an active management portfolio strategy that shifts the percentage of assets held in various categories to take advantage of market pricing swings or strong market sectors.
Not having a strategy to lock in gains and avoid losses is a big mistake.

Additionally, investors need to stay on top of new products and tools.
Exchange Traded Funds (ETFs), Target-date Funds and Monte Carlo Simulations are not exactly new but many have not heard about them let alone understand how to use them to reach their retirement goals.

I hope you find this helpful

Bryan Daly
First American National Registered Investment Advisors


Join Our Mailing List

Join Our Mailing List

Wordpress Social Share Plugin powered by Ultimatelysocial