I’m seeing several investor mistakes with new and potential clients that bother me. With all the boundless knowledge and access to information that we have in today’s world, I still see some things regarding portfolio construction I simply don’t understand.
I still see people who hold funds that have incredibly high fees. Some people even still hold funds that have front loads. I thought those types of funds were a thing of the past, but they still keep popping up on statements from people who want me to take a look at their “stuff.”
Never buy a fund with a load fee of any kind! Remember, you are probably better off buying an ETF or index fund with no load and costs next to nothing each year. If you disagree, read “The Index Revolution” by Charles D. Ellis or take a look at all the other research that has shown how time and time again, your best bet is to go low-cost index. There have been a few money managers who found value and performed well over a long time frame, but unless you have the time to find them, your best bet would be to just buy the index for next to nothing. If your fund(s) has an expense ratio over 0.5%, it’s time to talk to me. We’ll complete a side-by-side comparison with a comparable index fund.
I see potential clients trying to (or have other advisors trying to) time the market. I have even had people bring me statements where they are holding inverse funds, hoping the market is about to tank (or at least head lower)! What a bet to make and, in my opinion, a poor way to build long-term, long-lasting wealth.
There is too much research and supporting evidence to believe this is the long-term solution to your wealth and retirement. There is also a lot of research showing the damage it can cause to your portfolio, retirement, wealth, and future if you miss out on the best 5, 10, 15, etc. days of each year. The funny thing about it is these days typically occur right after drops in the market, making it perilous for those who try to time, yet need to catch the good days. They may be able to for a year or two, but throughout a career is highly unlikely.
I have seen so many people try to accomplish this. When you show them what their account balance would be had they just taken that initial amount and put it into a conservative, balanced portfolio, they are usually sick. For those of you who believe you can still time and outperform the market, I sincerely mean this: best of luck. For your sake, I hope you succeed.
Another common mistake I see is people who lack proper diversification in their portfolios. They purchase any fund in their 401k that says “growth.” That is fine, but just realize that this usually means a particular fund invests in high-growth companies. You may be missing opportunities with “value” companies.
Remember, the only investors able to show great returns over the long run have been those able to find and invest in value. Now, growth has been the bell of the ball over the past decade or so, but you did not want to own them in the dot-com bubble! Value would have been your best friend through that time. Either purchase a low-cost target date fund in your 401k or diversify with a global portfolio of growth and value funds, small and large companies, etc. Again, you can’t time the market. Your 401k should be boring. That is ok.
The final word on all this is about something I wrote a previous blog post about: understanding your advisor’s fee. An advisory fee is a fee that your advisor or broker may charge on top of the expense ratios you pay with each fund you own. Again, if the fee you pay is over 1.00% annually, consider another advisor. If he is 1.00%, have him show you the value he brings.
Remember, you can create a fantastic portfolio using just VT and BND from Vanguard for literally next to nothing. If your advisor cannot show you any value above and beyond what you could get by simply investing in those two funds, dump him. He should be able to bring you value through tax-efficient savings, strategies, estate planning, insurance advice, etc., and should be able to quantify it for you net of his fee. Your wealth, retirement, and future are too important to ignore.
If you have any questions about investor mistakes or anything I have talked about or would like us to take a look at your “stuff,” please reach out.
The views expressed represent the opinion of Good Life Asset Strategies, LLC. The views are subject to change and are not intended as a forecast or guarantee of future results. This material is for informational purposes only. It does not constitute investment advice and is not intended as an endorsement of any specific investment. Stated information is derived from proprietary and nonproprietary sources that have not been independently verified for accuracy or completeness.
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