More than once I have met friends who don’t know which assets they have in their portfolio. Also, they have no idea how the portfolio is performing. They don’t know if they are making money or if they are losing money. It seems that they don’t even care.
Most people go to their financial adviser and simply do what the adviser tells them, blindly, without knowing why, without knowing what the strategy is? What are they trying to achieve? Do they own regular mutual funds? Stocks? ETFs? Bonds? A combination of all of those? Who knows? Who cares?
A friend of mine chose an adviser because he was invited to a restaurant. My friend ate a delicious steak, drank a glass of wine and listened to a persuasive presentation. In addition, the owner of the firm was Jewish. My friend has the impression that because many Jews are financially successful, he would become successful by association. I took a look at his portfolio and I saw mutual funds with high expense ratios. Maybe the reason why this owner is financially successful is because he charges high management fees to his clients, which means that the clients will be less successful. Maybe my friend should read: Where Are the Customers’ Yachts by Fred Schwed.
Another friend had life insurance in her portfolio. But my friend is single with no dependents. When I asked her why she had life insurance, she told me that her financial adviser suggested it but she didn’t remember the reason. Maybe a high commission for the adviser was part of the reason?
Many people, on the premise of diversification, buy similar funds run by different companies. For example, a big-company-U.S.-fund is practically the same whether it is managed by Vanguard or Fidelity. They are buying two similar products with different brand names. That is not diversification.
Many people have investments which don’t fit their objectives. I have seen it a few times; Investors in their early 30s owning a high percentage of bonds, and investors in their 60s owning only stocks. But the absolute worst are the investors who have 100% of their portfolio in cash because they don’t know what to do with their money.
Finally, it is extremely important to know if you are making any money. Investors with many assets in their portfolio could have some assets going up in value and others going down. Also, they could have many deposits and withdrawals during the year. It could become complicated to figure out what the actual return is, but the only way to find out if you are getting closer to your objective is by measuring your returns. There are many software which would help you keep track of your returns.
My advice to you:
- Make a list of all your investments.
- Figure out what your objectives are. Retirement, vacation, downpayment for a house, education, etc.
- Figure out what your risk tolerance is and keep the assets which are in line with your risk tolerance and objectives.
- Divide your investment in the most tax efficient manner. Some investments belong in your taxable account and some belong in your nontaxable accounts.
- Measure your progress at least once per year, and readjust your portfolio to make sure it still meets your needs.