Often, individuals with substantial accumulations manage their own money or work with a financial advisor more inclined to sell a product than add value. Many of these individuals are “leaving” money on the table. However, this opportunity cost lost is often not realized. Here are the biggest mistakes made by individuals and advisors alike.
Many portfolios are considered diversified. A allocation of 45% Bond, 45% Stock, and 10% Cash could be considered diversified. Keep in mind, just because a portfolio is diversified, does not mean it is efficient. An efficient portfolio maximizes the return of the portfolio given a certain level of risk. An inefficient portfolio will lead to an investor taking too much risk for the return they are receiving or not enough return for the level of risk they are taking. This leads to volatility and lower returns which affect the accumulation in their portfolio.
Investors continue to place accumulations in high expense investments. This is either due to a lack of understanding or a financial advisor that is trying to make a commission. High fees and expenses are often hidden deep in the prospectus and not apparent on quarterly statements. High expenses eat into an investor’s return which leads to a lower future accumulation.
Poor Tax Planning
Many investors do not have a tax plan with their investments or rely on an accountant that may not see the big picture. Inappropriate investment tax planning for a future goal, or a poor strategy for taking money out of investments can lead to unnecessary tax consequences.
No Estate Plan
Out of date estate planning, inappropriate estate planning, or no estate planning can lead to higher estate costs, delays in passing on assets, and potentially higher estate taxes. It is not fun planning for your own death, but necessary.
Lack of Consistent Monitoring
Portfolios and situations change over time along with tax laws, products, and risk tolerance. Portfolios should be rebalanced and adjusted over time as asset classes become out of balance. As tax law changes, your portfolio strategy may change along with which investment products you choose to use. In addition, there may be changes to estate plans as the estate tax threshold changes.
As Daniel Goldie and Gordan Murray wrote in The Investment Answer, “Attempting to invest on your own can be difficult, time-consuming, and emotionally taxing. Most individual investors do not have the skills or the inclination to manage their own investments. However, even for those who do, this may not be a good idea. In today’s world of global markets and complex financial instruments, professionals have access to superior resources. It is difficult for an individual investor to efficiently put together and maintain an efficient portfolio that is properly diversified, minimizes fees and taxes, and avoids overlapping assets . In addition, the ongoing monitoring of your portfolio and maintenance of your desired risk exposure can be challenging and overwhelming without access to the tools that are used by competent professional advisors. What’s more, our own natural instincts can be our worst enemy when it comes to investing.”
I believe, the stakes are just too high to try to plan and invest on your own.
This article is written by Kevin J. McNab. Kevin is President of McNab Financial, LLC and is a CFP®, ChFC®, and CRPC®. This article is not intended to contain investment or tax advice. Please contact your investment and tax professional to discuss investments discussed in this article. McNab Financial, LLC is a Registered Investment Advisor in the State of Colorado.