Retirement Mistake No.2: Not Seeing Danger Signs in Your Portfolio
Posted In: Retirement Planning for Entrepreneurs

Problem: Unless you’re an asset-allocation specialist, how do you know whether your portfolio is matched to your risk tolerance?

Here’s a fact for you. In a study by Brinson, Singer, and Beebower (1991) Financial Analysts Journal, asset allocation accounts for 91% of portfolio performance, with security selection and market timing factors accounting for less than 5%. Knowing this fact, most investors focus on specific securities or market timing on which to base investment decisions, yet this accounts for less than 10% of the performance. Stop wasting your time. Think about making use of asset allocation strategies to improve your performance. When an investor is frustrated with lack of performance, nine times out of ten it is based on asset allocation and a lack of diversification.

One danger sign common to most portfolios is lack of structure. To build a successful portfolio you need to have multiple asset classes (stocks, bonds, cash, alternative strategies, real estate); multiple styles (value, growth, income, and small, medium, and large capitalization); multiple geographic components (Canada, US, Europe, Asia); and multiple income components (interest-sensitive equities, Government bonds, Corporate bonds, real return bonds, high-yield bonds, mortgages, international bonds,term deposits). Let’s face it, diversification is not just buying a few stocks and a few bonds. Here are the remaining nine danger signs possibly lurking in your portfolio.

  1. Lack of clear investment policy statement (IPS)–a structure that is clearly defined and understood. Ask your financial advisor for your IPS for your portfolio.
  2. Investments mismatched with objectives or risk tolerance–understanding risk and how it relates to your money and portfolio.
  3. Under-performing investments or managers–know when to hold them and know when to fold them.
  4. Style drift portfolios–that look at risk-adjusted return.
  5. Overlapping investments or management styles.
  6. Excessive expenses or trading activity.
  7. Lack of a system or lack of regular monitoring, adjusting, and rebalancing.
  8. or untimely reporting–when do you review this stuff.
  9. Lack of communication and service.

Speak to your financial advisor today about potential danger signs in your portfolio. Did you read our last article on Retirement Mistake No.1?

Success comes to those who set goals and pursue them regardless of obstacles and disappointments. – Napoleon Hill

The future depends on what we do in the present. – Mahatma Ghandi


Published with permission from Grant Hicks