The market carnage to close out 2018 carries an important reminder. Investing is hard. Performance comes and goes. The last nine years of easy money and unimpeded positive market performance had many investors believing the gains would continue in perpetuity.
There are some silver linings to come from the year-end market swoon. For one, investors that were on auto-pilot for the better part of a decade are paying attention again. That's a good thing.
We've compiled a list of things you can control that will increase your probability of achieving a successful outcome. These are not performance chasing tips. Rather, sensible ways to shore up your investment portfolio before those not-so-obvious loose ends become unraveled.
All-In Investment Cost
We have written ad nauseam about the "all-in" cost of investing. Unfortunately, many of the portfolios that come across our desk are riddled with conflicted financial products that come at a high cost. Even worse, most investors have little idea what they're being charged. If you pay an advisor 1%, that's not your overall cost of investing, especially if you own mutual funds.
Paying a Fixed 1%
Paying a large institution a fixed 1% is tolerable when the market is screaming higher. It doesn't feel so good when your portfolio value is cratering. What's even more offensive? Their blanket advice is often to stay the course. That's fine for a 25 year old risk seeker, but uncomfortable for a recent retiree. Remember, the fixed 1% advisor gets paid to retain clients and bring in new assets, so parroting "stay the course" is the path of least resistance.
Once again, it's easier to stomach paying capital gains when your portfolio value is higher. According to Morningstar, mutual fund companies are slated to pay out outsized capital gains in 2018. How would you like to have awful returns and a huge tax bill? One of the many reasons why we would never invest a client dollar in a mutual fund.
Where you own stocks and bonds can be almost as important as what you own. Did you know those dividend paying stocks in your taxable account are saddling you with a tax bill every year? Check out our approach to minimizing unnecessary investment income thus increasing your after-tax return (simply by optimizing where you own certain assets).
Planning for Ugly Market Environments
If your financial plan does not include ugly market environments, you're more likely to make a destructive emotional decision during the next downturn. A good financial plan will help you understand all possible outcomes, good and bad.
Acknowledging Blind Spots
Our financial worries are usually focused on external events. For example, we are obsessed with the latest headline out of Washington or the next Fed decision. While potentially market moving in the short-term, these events are outside of our control. It's our reaction to the constant stream of events that really matters. The most dangerous thing isn't an extraneous event, politician, or market shock. The most dangerous thing is our behavior.
Have a Pulse on Risk
This summer, a regular golfing buddy asked me to look at his portfolio. He mentioned his asset allocation as "pretty conservative." A week later his statement arrived in my email inbox. I was expecting to open a statement of mostly bonds with a sprinkle of equities mixed in. Much to my surprise, the portfolio was 100% equities. The gap between my friends perception of his investments and reality was as wide as the Grand Canyon. You don't have to be an expert in every holding, but you should have a good grasp of your asset allocation and risk levels.
Throw away the Wall Street 2019 predictions, ignore grand prognostications of what happens next, and don't listen to random or poor advice from friends and family. If you really want to achieve a favorable outcome, turn the focus inward on things you can control.
Happy Holidays from Pure Portfolios!