I’ve spoken before about my experience in the online brokerage industry. While I learned many things in my years there, one thing that it helped me with immensely was my investment portfolio. I would speak with people on a daily basis who made decisions that seemed completely irrational from an investing standpoint, yet they continued to make them day in and day out. This is not to badmouth clients I spoke with, but to communicate how often we can negatively impact an investment portfolio yet fail to see it.
Ultimately, we are all humans and are prone to mistakes but the experience allowed me to see things that I, and other investors could avoid in dealing with our investment portfolios. While certainly not intended to be exhaustive in nature, these are ones that come to my mind first.
We Pay No Attention to Fees
I learned very early in my experience that fees can be a major drag on investment returns. Whether you are stock trading or investing in mutual funds you are not immune to this drag. Trading fees, if left unchecked can add up very quickly and can be even worse if your commission is too high. What if you do not trade stocks, but invest in mutual funds instead, are you immune to fees then? Not by a long shot! I saw too many investors to remember who would invest in mutual funds that had ridiculously high expense ratios and that does impact an investment portfolio.
While it may be tempting to think that it’s just one mutual fund that has a high fee or that it is only a few stock trades, the overlooked issue is time. If either of those are allowed to run unchecked it can take tens of thousands of dollars away from an investment portfolio over time. I know it may be hard to believe that, but I saw it on a daily basis. There are some ways to mitigate this. For instance, you can negotiate lower commissions if you trade stocks or check out Morningstar if you are interested in investing in a mutual fund so you can find one that has a lower fee structure.
Not Viewing all of our Holdings as one Investment Portfolio
Another big issue that I saw plague retail investors was not viewing all of their specific accounts as being part of one greater investment portfolio. Speaking personally, we have at least four or five brokerage accounts that make up our portfolio but we do ourselves a disservice if we do not view them as a whole. By not viewing them as interconnected parts of a greater whole, we leave ourselves open to over concentration in some sectors and not invested at all in others. Ask yourself if you have any old 401k plans out there, I know most people I spoke with had in the neighborhood of two or three.
Why not roll those together into one retirement account or move them into your current 401k plan? That does provide ease of use and better ability to manage your investments as a whole. While there may be reasons to not roll plans together, the last thing you want to do is not view them as part of your bigger investment portfolio as that could impact returns as a whole. Or, you can use free online software like Personal Capital to track everything together in one spot.
Ignoring our Investment Accounts
We all have busy lives and our investments in the stock market can easily take on a lower priority if we allow them to. I saw this day in and day out and many were saddened to see the result of ignoring their investment portfolio. It never failed, the end of the year would be upcoming and clients would call in to check on their portfolios. The only thing is, they would say they had not looked at their investments in years going as far back as 2000. Not only have we seen the tech bubble burst in that time, but we also saw the Great Recession and the resulting comeback. Just imagine the shock of thinking you had hundreds of thousands of dollars invested in the stock market to find out that your investment portfolio was half or a quarter of that now…yeah, it’s not good.
Not Having an Investment Plan
A few years ago I was introduced to the idea of having an investment plan, and once I saw it, I wondered how I invested without it during the years leading up to my implementation of it. Just as it can be beneficial to budget your monthly income, an investment plan is of similar thought. If done thoroughly enough, it can allow you to have a framework that you can refer back to before making a purchase decision as well as when you want to sell out of a holding. Not only can this help you avoid having losses grow, but it can also help you avoid losing out on gains you have built up. I’ll not go into depth on formulating one here, but think of it as a plan for your investing. My suggestion is that if you like the idea of having an investment plan, then write it out so you can keep it before you in order to help stave off emotional decision making.
Buying off of a Hot Tip
We all have a friend, co-worker, or relative that seems to have that hot stock tip. Every time I heard this from a client I would just grimace as nine times out of ten it would unfortunately blow up in their faces. I know it is tempting to think you can get in on a stock and see it sky rocket and triple your investment portfolio overnight. The truth is though, the chance of that happening is very few and far between. While it’s not as “sexy” as stock picking off a hot tip, due diligence and researching your investments before you make them can help mitigate risk. You’ll never get rid of risk altogether, but at least it can be based off of reason and merit as opposed to a tip.
None of us are Perfect
At the end of the day, we’re all human and we all make mistakes. When you’re investing in the stock market, making mistakes is inevitable. We allow emotion to get the best of us and dictate decisions we would not make normally. I did this myself last year when I was holding some Apple options. I had already seen a very nice profit, but emotions were starting to play on me and I did not follow my investment plan. While I did realize a very nice profit, I left several thousand dollars on the table because I acted out of fear of losing my gain as opposed to reason. Looking back, I allowed my normally cool head get lost and made a decision that resulted in me not profiting my investment portfolio as much.
What did I miss? What are some things we do that have a negative impact on our investment portfolios?