Making decisions in the financial world can intimidate the most confident of us. In fact, even people with multiple degrees and significant successes will often admit their inadequacies when it comes to financial topics like investing.
If you feel insecure navigating the investment world, you are not alone. A recent study showed that only 51% of Americans were confident with the term “index fund,” and a mere 57% felt that they could adequately explain “asset allocation” or “stock options*.” The financial field often seems more like a landmine; we fear that one wrong move will result in financial disaster.
Luckily, with a financial advisor company near Utah County, you do not need to know the ins and outs of every financial concept in order have a successful investment strategy. As you contemplate your investment strategy, be sure to avoid these three common mistakes:
1. High Investment Fees
In most things, you get what you pay for. If you pay more for a car, you get a better car. If you need a better lawyer, that lawyer’s going to charge more than their peers. Investment funds turn that axiom on its head. With investment funds, there’s a strong relationship between lower fees and better performance.
That’s because, if you pay an extra 1% for your investment strategy, that strategy needs to be one percentage points ‘smarter’ than the average strategy just to break even. Considering the competitiveness of markets, it’s not surprising that the average high-cost fund can’t earn back the difference.
Personally, I consider funds with fees above .7 percent to be high-priced, between .7 and .35 percent medium priced, and funds below .35 percent to be low priced.
The best way to control investment costs for most investors is to stick to index funds, which track the performance of entire markets, and thus have no need for expensive analysts and research systems. This low-cost approach has ensured that index funds, in the long run, have outperformed their higher-cost, actively managed counterparts.
2. Investing with Street Knowledge
If the people who are paid millions to manage investment funds, who often have large institutions behind them to provide them with resources and research, can’t consistently outperform the market, why do you think you can? If you can’t provide a compelling answer to that question, you’ll probably be best off seeking professional advice or reading a handful of Jack Bogle books (look him up, he basically invented the index fund).
Some, who decide not to hire professional help, take the “do-it-yourself” approach. They throw some money into the market and make decisions based solely on personal research, instinct, and hear-say. The problem is, for someone to win in financial markets, someone else has to lose. Referred to as “odd-lot traders,” do-it-yourselfers are often viewed as a source of profit for many professional and institutional traders.
You can actually keep your own returns by using index funds** or hiring the right investment advisor. Even many sophisticated do-it-yourselfers will admit that working with the right advisor saves them valuable time and money.
3. Making Emotional Decisions
“Buy low, sell high” is the timeless mantra of investing. Yet, too often, investors, caught up by the emotional impact of swings in their portfolio, do just the opposite. Emotional investing will cause us to flock to investments that are currently rising and selling the ‘losers.’ Buying high and selling low is a losing strategy if there ever was one, but this is exactly what many do-it-yourself investors do with their life savings. The solution? Once you decide on a strategy (make sure it’s appropriately diversified), avoid changing it except to rebalance.
Portfolio rebalancing naturally sells high and buy low. Let’s pretend a hypothetical portfolio starts with an appropriate allocation target, like 60% stocks and 40% bonds. If stocks do well relative to bonds, the allocation percentage of stocks will rise above 60%. To rebalance, you will sell the excess percentage points of stock (selling “high”) and buy back into bonds (buying “low”). So long as stocks and bonds do not move exactly the same way, rebalancing will always create a sell high, buy low effect. The same process works for any other subdivision in your portfolio. This process works counter to your emotions but towards increased portfolio gains.
At True-North Wealth, we are a fee-only financial planning company around Utah County that creates low-cost, academically sound investment portfolios tailored to your needs. When you work with a trusted fee-only planner, you can ensure that you are receiving unbiased advice. No matter your investment knowledge, the advisors at True-North Wealth can aid you in creating a plan that you feel confident with.