Five Common Investment Missteps That Could Derail Your Retirement

Here is my column in today's Contra Costa and Valley Times. They shortened the article considerably so I thought you all might enjoy reading the unedited longer piece.


Five Common Investment Missteps That Could Derail Your Retirement

As an investment manager and financial planner, I don’t know how many investment portfolios I’ve reviewed over the past 20 years. I consistently see the same missteps made by investors over and over again. These slip-ups can be avoided. Some of these are easy to fix and others may take time, effort and due diligence to resolve. Now that tax season is over, this is good time to turn over a new leaf and get your finances organized and well deployed. Here are some of the main missteps that I see frequently.

Misstep #1, A Trail of Accounts: When I meet with a clients to review their portfolio for the first time, I can expect to be handed a plethora of statements from different brokerage firms and 401(k)s from previous employers. There is no reason to have 10 different investment accounts. By having your assets strewn around so many places you’ve just made it impossible to monitor the performance of your investments and periodically rebalance. Get organized! Simplify your life by rolling your old 401(k) s and 403(b) s directly into an IRA at one brokerage firm. Open one brokerage account for your non-qualified (non-IRA) assets and consolidate. Two to three accounts are easier to follow than 8 or 10. In addition, there are definite advantages to having all of your accounts at one brokerage firm. Frequently, brokerage firms give investors a break in fees, higher money market rates and better service if all your accounts (IRAs, taxable brokerage accounts, etc.) are consolidated at one place.

Misstep #2, Track the Performance of Your Portfolio: Most investors do not know how their investments are performing. They do not know what their annualized rate of return is for each account much less the consolidated portfolio. Most people just glance at their monthly statements to see if their accounts are up or down but, they really do not know how they are doing. It is important to know your portfolio’s performance and how it compares to the major indices. Monitoring your portfolio’s performance is equivalent to knowing your batting average and how it compares to everyone else’s in your league. To be informed you need to know your stats and how they compare. If you don’t monitor your performance you won’t know what grade you received (an A or an F) and if you are on course to achieve your financial goals.

You can download this information into Microsoft Money or Quicken, and this software will calculate your return. After you have your total portfolio’s return, the next step is to compare it to the index returns. It is easy to find information on the major indices in your newspaper or on the internet. Websites like Yahoo Finance (finance.yahoo.com) and Google Finance (finance.google.com) can be very helpful in monitoring index and investment performance. Once you have the software downloads working, it will be easy to monitor your portfolio’s performance compared to the major indices.

Misstep # 3, Create an Asset Allocation: Even if they have only a few accounts, most people do not know how their assets are allocated, and approach each investment account separately. This piecemeal approach results in a mishmash of investments that does not reflect their goals, retirement plans or risk tolerance. It is important to construct an asset allocation for your entire portfolio instead of just looking at your IRA and then three months later your 401(k). The first step is to develop a coherent asset allocation plan for your entire portfolio and then decide how to implement the plan among your different accounts. A great place to start is the SEC (Securities and Exchange Commission) website (www.sec.gov/investor/pubs/assetallocation.htm). It explains the basics of asset allocation and has some good links to other resources.

Misstep #4, : Most investors don’t know anything about the investments they hold. For instance most investors are clueless when it comes to the credit quality of their corporate bonds, the fees charged on their mutual funds, the outlook on a particular stock, or other important details about their holdings. By not understanding their holdings, investors are frequently invested in very risky ventures and paying exorbitant fees.

If you do not have time everyday to devote to your portfolio, then do not invest in individual stocks or bonds. Be honest with yourself and admit that once you are invested you are never going to look at your investments again. In this situation, I would recommend you research some of the new lifecycle funds. These funds rebalance to a more conservative asset allocation as the targeted portfolio date (specified in the fund name) approaches. Unfortunately, most of these funds are too conservative (too heavily weighted toward cash and bonds) so don’t select a fund with the same target date as your retirement. Instead consider selecting a fund with a targeted date that is at least 10 years further off than your impending retirement. This will help you avoid asset allocations that are too conservative.

It is worth the time and effort to research your investments and not just opt out by using lifestyle funds. You lose control of your asset allocation and the fees are higher for lifestyle funds. I recommend using a combination of mutual funds and index funds to execute your asset allocation plan. This is a great way to diversify and manage risk. It won’t require you to daily manage your investments; bi-monthly to monthly monitoring should be enough once your portfolio is all invested.

It is important to research the cost of these investment vehicles before investing. Many investors are surprised to find out that they are paying a load or 12b-1 fee on their mutual fund investments. It is important to know the up front, annual or back end fees you will be paying before investing. Fees are usually buried in the back or middle of a Prospectus which is a legal document published by the fund company. You can also find information regarding fees and more on the internet at the Morningstar website (http://www.morningstar.com/#A1) and FundAlarm (http://www.fundalarm.com/) before investing.

In addition, it is very important to understand what the fund is purported to be invested in and what it is really holding. Janus Overseas is labeled by Morningstar as a Foreign Large Growth fund. Except Janus Overseas has a great deal more risk than any fund in this category because it is 27% invested in Foreign Emerging Markets (China, India, Thailand). This is a great deal riskier than being invested in Large Companies in Developed Foreign markets (Germany, United Kingdom, and Japan). In fact, most Large Cap Foreign funds typically have a 3% to 5% exposure to Emerging Markets. So if you had allocated part of your portfolio to Foreign Emerging Markets and then bought Janus Overseas, you would be over-weighted in Emerging Markets and have a riskier portfolio than you intended. Make sure you read the fund’s prospectus and research the funds using the two websites listed above.

Misstep #5: Not doing anything because you are too busy or are intimidated is the biggest misstep of all. It is your money and it may very well be your sole support in retirement. Take control or get help by hiring a professional financial planner. Get organized and design an investment plan that will help you meet your life goals and retirement plans. Good luck!

Libby Mihalka
The Financial Pragmatist