How’s your Portfolio?

MONEY TALKS – People typically walk into our offices because they are overwhelmed with the amount of financial information being floated out on the TV, internet, water cooler, or family gathering. When it comes to money, everyone seems to have an opinion. This overload of information often leads to a medical condition I have aptly labeled “financial paralysis.” Thankfully it’s easily identified by monitoring these three symptoms; overwhelmsion [sic], suspicion, and confusion.

It’s easy to become overwhelmed by all the investment choices available. With tens of thousands of options to select from, it’s hard to decipher a good investment from a poor one. People often become suspicious because they don’t know if the “advisor” across the table is selling them something because it’s in their own best interest or that of the advisor. And they’re confused how it all interrelates with one another. They aren’t sure how different accounts are treated for tax purposes and why specific investments may be better suited for one account over another. As a result of this “financial paralysis”, people tend to ignore their investments and often come into our office with one of the following problematic portfolios:

Safety First - The Safety First portfolio is usually created because of an underlying fear of losing money. This portfolio is designed with one objective in mind: protect the principal balance. As a result, the Safety First portfolio usually has a high concentration of cash, certificates of deposit (CD’s), and stable value funds. The problem with a conservative portfolio of this nature is the expected return is much lower than a portfolio that contains equities. As a result, the Safety First portfolio often fails to keep up with inflation, effectively eroding the principal balance because of the loss in purchasing power which puts the individual at a greater risk of running out of money.

Home Sweet Home - The Home Sweet Home portfolio often has a strong preference towards U.S. equities (frequently > 75%). This portfolio is typically constructed with blue-chip stocks such as Google, Microsoft, Apple, Amazon, Facebook, or mutual funds that mirror the S&P 500. While U.S. Large-Cap companies should be a part of any well balanced portfolio, there are significant risks to creating a portfolio that contains little or no foreign equities. By only investing in U.S. companies, the portfolio is subject to market risk, where the entire stock market falls, as well as legislative changes such as tax and trade policies that could negatively impact American companies.

Cloudy with a Chance of Meatballs - The Cloudy with a Chance of Meatballs portfolio is earmarked by having too many accounts. More often than not, there are several 401(k) accounts from old employers, a current 401(k) account, an IRA, one or two brokerage accounts, as well as a spousal account such as a 403(b). The biggest problem with having all these accounts is it’s difficult to track, maintain, and monitor. Furthermore, without sophisticated software it’s nearly impossible to see the global asset allocation of all accounts, making it impossible to rebalance, since you need to know where you are before you can get where you are going.  Additionally, these portfolios are usually tax inefficient because the individual accounts are not coordinated with one another from an asset location standpoint.

Strong to Quite Strong - Ironically enough, the Strong to Quite Strong portfolio is usually designed by the most novice investors. These portfolios typically have one or two target date mutual funds and a random domestic stock fund. By nature, most target date mutual funds are well balanced because they contain both U.S. and international equities as well as broad market bond funds. The problem with the Strong to Quite Strong portfolio is, while well balanced, it does not take into account the individual circumstances or risk tolerance of the investor. Just because two people are the same age or plan to retire in the same year does not mean that their portfolios should be identical. These faulty assumptions often lead to overaggressive portfolios that can scare off investors who have a lower tolerance for risk than their contemporaries.

Regardless of which portfolio you may identify with, there is no one size fits all when it comes to designing a well balanced portfolio. It’s important to evaluate your goals, needs, and risk tolerance before constructing (or deconstructing) a portfolio. Working with a professional investment advisor or fee-only financial planner (preferably a CFP®) may help to give you the confidence, guidance, and motivation you need to align your portfolio with your life goals.