While poor investment outcomes can result from a variety of reasons, there are a few common mistakes. The good news is that these mistakes can be avoided with a small amount of planning and discipline. See below the mistakes that I refer to as the “Big 3”:
For weekly insights, follow The Welch Group every Tuesday morning on WBRC Fox 6 for the Money Tuesday segment.
Inappropriate Asset Allocation
The most common way I see investors inflicting unnecessary pain on their portfolios is through inappropriate asset allocation, which can be an incorrect ratio of stocks to bonds, fixed income, and cash. While there is no one-size-fits-all approach, the appropriate mix should be a function of your timeline and goals/rate of return expectations and risk tolerance.
Recommendation: Determine when you will become reliant on your portfolio for cash flow and the amount of assets you will need to accumulate between now and then (To Calculate: Determine how much you think you need on an annual basis and divide that number by 0.04). With that number, you can determine your stock to bond mix based on your expected annual savings rate and expected rate of return on stocks. For illustration purposes, you could use an 8% planning assumption for stocks, and 2% for bonds, fixed assets and cash. This mix is now your baseline. It is not necessarily wrong to be more aggressive than your baseline but understand that you are adding downside risk along with your potential upside.
Lack of Diversity
Diversity within investment portfolios is well documented to reduce risk and add to investment returns over time, but many do not follow this axiom. While lack of diversity is often a conscious decision made by investors, investors often assume they are diversified when they are not.
Recommendation: Review your concentration of specific stocks and sectors of stocks within mutual funds and exchange-traded funds (ETFs). While many investment products present themselves as diversified, they are often lacking in that regard. If developing a portfolio of individual companies, look to invest in at least twenty companies (Preferably 30 or above) across multiple sectors and be willing to do your homework about their underlying fundamentals.
Letting Tax Avoidance Dominate Your Investment Decisions
Due to the strong bull market from 2009-2021, many investors with taxable investment accounts find themselves with concentrated investments they refuse to take profits from for tax reasons. While there are often good reasons to avoid tax events, (i.e., the elderly holding low basis stock positions where estates will experience a step up in basis upon death), I often find investors being stubbornly tax averse, which can lead to painful outcomes.
Recommendation: If you find yourself in this position, work with a Certified Financial Planner™, or tax advisor, to quantify your potential downside price risk with the tax liability associated with reducing the position and realizing taxable gains.
Marshall Clay CFP, J.D., is a Partner and Senior Advisor at The Welch Group, LLC, specializing in providing Fee-Only investment management and financial advice to families throughout the United States. Marshall is a graduate of the United States Military Academy in West Point, New York, the Cumberland School of Law in Birmingham, Alabama, and is a CERTIFIED FINANCIAL PLANNER™. In addition, Marshall is a frequent guest on local television stations as an expert on various financial planning matters.
IMPORTANT DISCLOSURE INFORMATION
Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by The Welch Group, LLC –(“Welch“), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Welch. Please remember that if you are a Welch client, it remains your responsibility to advise Welch, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Welch is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of Welch‘s current written disclosure Brochure discussing our advisory services and fees continues to remain available upon request or at www.welchgroup.com. Please Note: Welch does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to Welch‘s website or blog or incorporated herein, and takes no responsibility.