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Market Up, but My Portfolio Hasn’t Moved?

Many people in my social circle talk about their investment performance (even when I didn’t ask them to).  A recurring topic is “the market is blazing higher, but my portfolio hasn’t done much.”

We have put together the top reasons why an investment portfolio could chronically under-perform:  

Low Skilled Advisors/Brokers– low barriers to entry and misaligned advisor incentives are a common drag on client portfolios.  A few hours of study + passing an exam and viola you are a financial advisor.  Throw in most of advisors’ compensation is tied to selling products & beating the pavement looking for new clients and you can see how investment portfolios get poorly structured or neglected altogether.   

Reaching for Yield– investors shouldn’t choose investments based on portfolio income/yield.  In an era of low interest rates, it’s easy to substitute paltry bond coupon payments with higher dividend payments from equities or REITs.  It doesn’t help to receive a 7% dividend yield if the underlying stock is down 20%.  Total returns are all that matter.

Mutual Fund Fees & Expenses– the least transparent cost of investing.  Advisors don’t talk about it.  Investors don’t see it.  Mutual fund fees & expenses are a huge part of the total cost of investing.  Paying too much for under-performing mutual funds can be a huge drag on building wealth.  Throw in random capital gains distributions (realized gains down or flat years are the best) and you have an annual uphill climb to generate reasonable after tax & net of fee returns.

Do It Yourself Investors w/No Time– prone to make emotional mistakes or impulsive decisions based on recent information or event.  This approach can lead to inefficient portfolios that take on more risk than understood.  

Outsized Investment Management Fees–most advisors of the Wall Street establishment charge ~1-2% for the investment management fee.  Once we add in the cost of owning the assets (Mutual Fund Fees & Expenses) and tax drag, we are looking at 2-4%/year.  In the roaring 1990s, most investors didn’t care about fees with the market appreciating 15+% per year.  With lower future expected returns, investors need to be mindful of their “all-in” cost of investing.  For example, paying 2.5% for a portfolio that generates a 6% return is giving up ~42% of the gross performance in fees!  

Hedge Funds/Alternatives– exposure to hedge funds makes sense from an academic standpoint i.e. adding an asset class that lowers portfolio risk during times of market stress.  Unfortunately, the outsized expenses of hedge funds make the asset class prohibitive and non-practical.  This is especially true in the retail investment space (500k-$10mm) which utilizes mutual funds to mimic hedge fund strategies.

Commodities– It’s extremely hard to mirror the underlying commodity performance through a mutual fund or ETF (see Commodity ETF Trap).  There are often large disconnects (tracking error) between fund and commodity performance. 

Extreme Viewpoints– Market doomsday predictions, holding 90% cash/gold, large active bets, extreme market timing (reallocating >50% of your portfolio), emotional biases can wreak havoc on portfolio returns.

If your advisor makes it difficult to access net of fee performance or attempts to “explain away” perpetual poor results, we would recommend reassessing the relationship.  In our opinion, advisors should be judged on their investment results.  That’s why Pure Portfolios displays net of fee performance via our client portal (accessible 24/7).  Investors hire us to do a job and they have the right to know how we are doing.  

The fundamental reason why someone would hire an investment manager is to grow their assets.  Financial planning, estate planning, tax guidance, goal-based investing are nice perks to an advisory relationship, but the engine that drives the process is a properly built & efficiently managed investment portfolio.

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