Category: Mutual funds

Investment Mistakes Millionaires Make

Think millionaires don’t make investing mistakes?  Think again. The deVere Group asked some of its wealthy clients to tell them about the biggest investing mistakes they made before getting professional guidance. It demonstrates that the rich are not that much different. Keep in mind that many people get rich by starting a successful business or inheriting money. That does not make them smart investors.

Here’s a list of five common investment mistakes, and how to avoid them:

5. Focusing Too Much On Historical Returns

Too often investors look at stocks, bonds and mutual funds in the rear view mirror, expecting the future to be a repeat of the past. This is rarely the case. It’s why mutual fund prospectuses always state “past performance is no guarantee of future results.” Too many investors buy into last year’s top investment ideas, only to find that they bought an over-priced lemon. Investment decisions need to be made with an eye to the future, not the past.

That’s why we build portfolios based on what we think the markets (& investments) will do in the next 6-36 months. Of course we also look at track records, but in a more sophisticated way than buying last year’s winners.  And when investing in mutual funds, it’s vitally important to examine who is responsible for the fund’s performance and if that person’s still managing the fund.

4. Not Reviewing the Portfolio Regularly

Things change and your portfolio will change with it, whether you watch it or not. If you don’t watch it you could own GM, Enron or one of the banks that closed during the crisis in 2008. Every investment decision needs to be reviewed. The question you always need to ask about the investments in your portfolio is “if I did not own this security would we buy it today?” If the answer is “no,” it may be time to make changes.

We review your portfolios regularly, to make sure you’re on track with your stated goals.  We also offer regular reviews with our clients and prepare reports for them to show how they are doing.

3. Making Emotional Decisions

The two emotions that dominate investment decisions are greed and fear. It’s the reason that the general public usually buys when the market is at the top and sells at the bottom.

We help take the emotion out of investing.  We have a system in place that helps keep emotion out of the equation.

2. Investing Without a Plan

Most portfolios we examine lack a plan. In many cases they are a collection of things that seemed like a good idea at the time. This is often the result of stockbrokers selling their clients investments without first finding out what they really need.

We always invest with a plan.  You tell us your goals, timeline, etc and then we use that as an investment guide.  We don’t care about beating arbitrary indexes; we care about helping you achieve your plans with the least amount of investment risk possible.

1. Not Diversifying Adequately

One of the biggest risks people make is lack of diversification. It’s called putting all your eggs in one basket.   This often happens when people work for a company that offers stock to employees via their 401(k) or other plan. Employees of Enron, who invested heavily in their own company via their retirement plan, were devastated when their company went broke.   Sometimes investors own several mutual funds, believing that they are properly diversified only to find that their funds all do the same thing.

Nobody has ever accused us of being under-diversified.  We champion broad diversification in every one of the MMF (Managed Mutual Fund) portfolios we create. We choose funds that invest in different segments of the investment market. We own many assets classes (bonds, stocks, etc.). We diversify geographically, including some overseas funds. And we have style diversity: growth vs. value, large cap. vs. small cap. With rare exceptions, there is always something in our portfolios that’s making you money.

401(k) Balances Hit Record High

From CNN

The average 401(k) balance hit $89,300 at the end of the year, up 15.5{030251e622a83165372097b752b1e1477acc3e16319689a4bdeb1497eb0fac93} from $77,300 in 2012, according to an annual tally by Fidelity Investments. Most of the boost came from stock market gains as all three major stock indexes ended the year more than 20{030251e622a83165372097b752b1e1477acc3e16319689a4bdeb1497eb0fac93} higher.
People on the verge of retirement, ages 55 to 64 years old, saw their nest eggs grow to an average balance of $165,200 from $143,300 in 2012, Fidelity said. Savers with both a 401(k) plan and Individual Retirement Account managed by Fidelity had larger nest eggs, with an average balance of $261,400, up from $225,600 in 2012.

The 401(k) has replaced pensions as the way most workers save for retirement.  That’s a problem.  Most employees spend almost no time actually choosing the right funds in their 401(k).  It’s the reason that so many Enron employees lost their retirement when that company went broke.  It’s the reason why so many people lost so much in the crash of 2008 – 2009.

Even when their 401(k) holds most of their retirement savings, employees pay little attention.  The typical worker is given a list of mutual funds available to the plan and told to check off some boxes to say where his money is going to be invested.  The employer does not provide guidance, neither does the investment firm that sold the plan.  The typical “Big Box” broker is not paid to provide guidance, and typically doesn’t.

There is help for the worker who wants his money to grow while controlling risk.  There are a few RIA firms that can help.  If you are one of those whose 401(k) is serious money and you would like to get help, give us a call.

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Adding to Your Returns Four Ways

There are at least four things you can do to get better returns on your money.

  1. Create an asset allocation program and stick to it.  Don’t chase the market up and don’t sell at the bottom.  If you have created an asset allocation that is right for you, it should be robust enough to take advantage of rising markets and allow you to sleep well at night in declining markets.
  2. Be tax aware.  Don’t buy mutual funds in taxable accounts at the end of the year just before they make their capital gains distributions.  Take tax losses to offset capital gains.
  3. Keep an eye on costs.  Investment firms are increasingly turning to fees for services they once provided for free.  Your investment manager should be aware of the fees you are paying and keep them under control.
  4. Re-balance your portfolio regularly.  It may be tough to sell some of your winners and add to the losers, but it works.  It’s really tough to sell on euphoria and buy on fear, but some of our biggest winners were bought when nobody wanted them and they could be bought for pennies on the dollar.

Municipal Bond Risk

Municipal bonds are found in the portfolios of many higher income investors.  They have experienced great returns over the last 30 years.  Part of that has come from interest payments and part has come from bonds price appreciation.  Remember, falling interest rates (and we have seen interest rates fall since 1980) leads to higher bond prices.

The problem for bond investors is that rising interest rates have the opposite effect: bonds go down in price when rates go up.  And today’s low rates are largely being engineered by Federal Reserve policy of low, low rates to spur a slow-growth economy with high unemployment.  When the Fed stops easing, we can expect rates to rise, and perhaps rise rapidly.

Here’s Morgan Stanley’s take:

Investors in the $3.7 trillion municipal market will probably face negative returns in 2014 following declines this year, the first back-to-back annual losses since at least the 1980s, according to Morgan Stanley.
The company’s base-case scenario for city and state debt in 2014 calls for a loss of 1.7 percent to 4.1 percent, Michael Zezas, the bank’s chief muni strategist, said in a report released today. A year ago, he correctly predicted that munis would lose money in 2013 as yields rose from the lowest since the 1960s.

In addition, we have seen a rash of municipal bankruptcies which causes investors to be concerned about getting their money bank if a city defaults on its obligations as Detroit is set to do.

For investors who have accumulated large municipal bond positions either as individual bonds or as bond mutual funds, caution is the watchword.

5 Bad Ways to Pick a Mutual Fund

The Sunday Wall Street Journal has an article with the title “Bad Ways to Pick a Mutual Fund.”  We think it’s worth while examining this list and making a few comments.

1. Focusing on past returns –

This may well be the biggest problem for people who pick their own mutual funds.  There is a good reason that funds mention that “past performance is no indicator of future results.”  There are all sorts of reasons that past performance may not predict how well a fund will do in the future.  Among them are management changes, style drift, and sector rotation.

2. Not looking under the hood

I am always amazed by the number of people who buy a fund without knowing what they do or how their money is being invested.   Going by an advertisement or an article in a financial magazine is no substitute for research.

3. False diversification

Buying multiple funds that all do the same thing is not diversification, its duplication.

4. Chasing headlines

I recall that dot.com stock funds were incredibly hot in 1999 and people losing their shirts when the tech bubble burst the next year.   The retail investor is never going to be ahead of the information curve.

5. Buying on ratings alone

Focusing on stars alone is as bad as buying based on what some magazine has deemed, say, the top five funds. In both cases, past performance plays too big a role.

The focus for serious investors is to look for a well diversified portfolio of funds that focuses on generating superior risk-adjusted returns.  To do that, serious investors get professional guidance.

How Great Advisors Search for Stand-Out Managers

In the bad old days, not that long ago, brokers for the “big box” stores recommended fund managers because

a) They were paid more or received benefits like trips or prizes.

b) They were trying to get their clients quantity discounts by using only one fund family.

c) They didn’t know any better.

So lots of unwary investors ended up with a hodge-podge of mutual funds, either all from the same fund family or a collection of funds that did not create a well diversified portfolio.  Many funds were not reviewed regularly and investors hung on to them for years because no one bothered to do any analysis.

Today a lot of the landscape still looks the same.  Even the “do it yourself” investor has a tendency to focus on things that may not really help them achieve their financial objectives.  For example, the focus on fees has a tendency to distract from issues that are more important.   Investors are constantly told that low expense index funds are the only way to go because they beat their actively managed cousins. Well, no, that’s not necessarily true.  Active managers can beat index funds, and have done so over long periods.  But managers need to be monitored.  A smart investor needs to keep track of how a manager is performing, be sure that he’s sticking to his discipline and, finally, make sure that he has not left the mutual fund to someone else to manage.

Well-chosen active funds can pull their weight during market downturns by cushioning portfolios from the full decline.  Since we can’t forecast the future with precision,  getting great returns on a risk-adjusted basis is the guiding principle for the selection of stand-out managers.  That’s why RIAs who are not part of one of the major firms and can give unbiased advice are so valuable.

What is an ETF?

Exchange Traded Funds, otherwise known as ETFs, are essentially index mutual funds that trade like stocks.  ETFs’ popularity is growing in part because some of the biggest names in the financial services industry are promoting them as alternatives to regular, or open-ended, mutual funds.

Benefit of ETFs?

What’s the benefit of an ETF?  First, most have a low expense ratio.  An expense ratio is simply the amount of money that the fund charges in fees.  A second advantage is that an ETF can be traded (bought or sold) any time that the market is open.  For example, if you believed that the stock market was going to go up during the day, you could buy a stock market index ETF in the morning and sell it in the afternoon and capture the gain (or loss).  You can’t do this on an intra-day basis with a regular open-ended mutual fund.

What are the disadvantages?  Up till now the buyer or seller of an ETF incurred a commission, just like the individual who bought or sold a stock.  This is not the case with no-load mutual funds that don’t charge a fee for either buying or selling.  That is in the process of changing as some of the biggest names like Schwab and Fidelity are offering free trades on a growing number of ETFs.

The other disadvantage for the typical investor is that most ETFs are index funds rather than actively managed.  That means that there is no-one actually making a decision about what stock or bond to buy, sell or hold.  Buying an EFT requires your active participation and management or you risk putting your investments on auto-pilot and hoping that they don’t crash.

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