Retirement Mistake No.19: Less Diversification and More Worry
Posted In: Retirement Planning for Entrepreneurs

Investment Advice


In his new and revealing book The Empowered Investor, portfolio manager Keith Matthews, having spent twenty years in the investment industry, offers some very practical advice to combat again investment risks. Here are some of his investment principles:

  1. Realize that no one has an investment crystal ball, including stock market strategists, economists, or financial advisory firms. Ignore predictions; they are one of your obstacles. Concentrate on executing and maintaining the winning strategies in your portfolio.
  2. Behavioral finance has shown that an investor’s emotions can have a negative impact on investment results. Often, hype found in the media, financial service literature, or even in social settings might entice investors to make investment decisions that they will later regret.
  3. Asset-class investing is the most important step in taking control of your investments, and it has a bigger impact on your portfolio than market timing or stock picking.
  4. Most investors and many advisors misunderstand the concept of diversification. They believe that because they own 15 stocks or 10 mutual funds, they are diversified. Too much overlap equals bad diversification. Improper diversification can be a recipe for disaster.
  5. Discover and use the Fama/French 3-factor model when constructing and designing your portfolio: Stocks outperform bonds; value stocks outperform growth stocks; small-company stocks outperform large-company stocks.
  6. Execute your asset allocation with asset-class index tools. All tools are not built the same. Build your portfolio and work.
  7. Write an investment policy statement (IPS). An IPS will keep you within your specified risk parameters and greatly enhance your investment experience.
  8. Recognize that costs matter. Taxes, management fees, trading costs, and investment advisory fees have an impact on your long-term investment results. Know your costs of investing.
  9. Investments and life work together, and a well-considered plan is crucial to ensure that your dreams become a financial viability.
  10. Get on with your life.

Putting Together a New Mutual Fund Portfolio

You’re retired, now what? You have a retirement nest egg and off you go to your local financial advisor for some recommendations. Then, you have some well-known or not-so-well-known mutual funds that seem to have done well lately. Finally, you want to add to the mix, so you pick a few more winners.

That is exactly what many investors do year after year. Based on last year’s performance, investors buy the hot-sheet funds published in magazines, in newspapers, or on Web sites. The problem is that if  they all did well together, they will most likely also fall together.

The goal is diversification and managing risks. You see, when investments are performing well, risks can be added to your portfolio,since the investments’ losses can be magnified as markets rise. Your risks increase as markets increase. Turn the newspaper upside down and try to find investments that under-performed your winners in the good times. That is where you may find bargains and opportunities.

Your goal should be selecting funds that are complementary, so that your portfolio consistently performs well year after year, instead of like a roller coaster. It may sound funny, but many investors sell the under-performing funds at the very time they should be adding to them. Asset allocation and professionally managed investment programs can assist you. They take the emotion and decision-making out of your hands and put them into those of  a team of experts aiming for a consistent return.

What to do

Talk to your financial professionals to be sure your investments are diversified and can weather the downturns when markets go south, as they do from time to time. They have software programs that can analyze your portfolio to see if it needs further diversification instead of just selling under-performers and buying top performers. After all, with a financial newspaper or Web site, anyone can do that; but that might not be the right thing to do next time you have money to invest.

All our dreams can come true–if we have the courage to pursue them. – Walt Disney

If  opportunity doesn’t knock, build a door. – Milton Berle


Published with permission from Grant Hicks

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