Saturday, December 02, 2006

I can tell that the end of the year is approaching...

The number of investment questions coming to me keep going up, and some of the questions are kind of poignant, indicating a lack of attention to important financial decisions that need to be made. Other comments reflect a blissful ignorance, the kind that I am almost sad to burst. In any case, here's some problems I've discovered recently.
  1. It's not enough to save. (Though apparently most Americans don't save) Once you've saved the money, you must get off your butt and actually invest. Keeping money in say, a Tax Exempt Money Market account will at least keep you from losing the value of the money due to inflation. But if that's all you did the last year, you missed out on the 14.24% return that Vanguard's Target Retirement 2045 did over the past year.
  2. Cost matters. The more money you have, the more it matters. If all you have is $100, a 1% fee is $1. When your portfolio is $1 million, the 1% fee has ballooned to become $10,000 a year! That's money going into a financial adviser or broker that should be going into your pocket. I consider an aggregate fee of more than 0.3% (that's right, 1/3rd of a percentage point) to be unconscionable. Go with a fee-only adviser if you can, and avoid wrap fees/wrap accounts like the plague.
  3. The S&P 500 should no longer be your benchmark! When you're looking at an overall portfolio, the S&P 500 is only one asset (domestic stocks), which should be around 30-40% of your total asset allocation. Benchmark against something like the Vanguard Target Retirement fund, which has a reasonable allocation of international stocks and bonds. I even consider that insufficient, since that Vanguard fund does not include REITs, which as Brian says, should be a significant proportion of your portfolio. For those of you who think that wealthy people find it easy to get good financial advice --- a wealthy person I talked to recently told me proudly that his financial adviser got him a 13% return this year, beating the S&P 500. He didn't realize that Vanguard's International Index fund returned 22% this year, for instance. Or that the REIT Index returned 37%. Precious Metals also returned astounding results, but you may or may not want to havethat in your portfolio. To add insult to injury he was paying more in fees than a Vanguard investor would have, reducing his relative performance even further from that of the appropriate Vanguard Target Retirement Fund for would have been. Compound these losses year after year, add in the fees, and you'll realize why Investment Bankers get multi-million dollar bonuses while you get stuck holding the bag.
  4. Figure out an appropriate asset allocation and stick to it! As with most things in life, the tough part isn't knowing what the right thing to do is, but doing it. The difference between those who excel and those who don't is that those who excel not only know what the right thing to do is, but they actually do it. Even if it's hard. Especially if it's hard. I find that lack of discipline is a major reason for portfolio under-performance.
I anticipate that next year will be a challenging environment to invest in. Buying a hot stock is not an investment strategy. Do your research, understand what an appropriate asset allocation is for you, and buy low cost indexed funds. It will not be exciting, and nobody will ever ask you for the hot stock tip, but that's the price of unconventional success.
Post a Comment