By: Chris J. Roe, CPA/PFS
Have you ever heard a financial advisor or money manager tell you their investment portfolio beats the market? How about them forecasting where the markets or economy will be in the next year?
It happens all the time. But here’s the thing. Great financial advisors do not guess or give investment opinions. Nor do they believe they can predict the future .
If you’re working with a financial advisor, or managing your money all on your own, you want to watch out for a few common pitfalls. At Rx Wealth, we call them the 7 “sins” of investing.
Sin #1: Gossip
If you try to time the market based on what you hear on TV, radio, or from your colleague or neighbor, you’re in for it. Remember, what you hear is just an opinion—and not necessarily a fact. Great financial advisors don’t employ opinions. Instead, they rely on financial science to manage wealth. For example, we know, based on years of academic research, stocks have a higher expected return than bonds and that certain characteristics, such stock size, price and earnings, tend to dictate their returns over time. As for bonds, their returns are determined by the credit quality and term (i.e., 1 year till you get paid back or 30 years till you get paid back). By considering how much stocks and bonds to hold and what types, we can more easily build a strategy that supports your investment goals.
Sin #2: Applying misinformation
Some financial advisors purposely obscure financial terms and systems. Why? So, their clients don’t have true control of their wealth. Then they sell them high-cost solutions. It’s just not right. Make sure you truly understand what your financial advisor is telling you. Ask as many questions as possible. For instance, when an advisors says he/she can build a custom portfolio just for you, you should ask them to show you academic proof that their “custom” portfolio will provide better long-term performance than say a “model” portfolio. We fully expect them to show you it will, without academic proof. But remember, they are showing you history and past performance not the future. No one can predict the future. We can easily tell you the past Super Bowl winners, but who will win next year? Would you hire us if we got history wrong? Remember, you are not hiring a financial advisor based on them showing you history, you are hiring them based on who you feel you can easily relate to and who can work with you to develop a strategy based on solid, time-tested academic research and financial principles that places you in the best position to excel in the future.
Sin #3: Envy
Making investments or investment decisions based on what your neighbors or colleagues say isn’t smart. Generally, people only tell you when they’re doing well—not when they’re losing money. Take what people say with a “grain of salt”. A better strategy is to base your investment decisions on years of academic research and solid fundamental investing principles, while keeping in mind that your discipline to saving money and your emotional decision making in good and bad times may ultimately determine your success.
Sin #4: Pride
Be on the lookout for a financial advisor that seems prideful. Don’t believe claims that an advisor can beat the market or build a better portfolio that will achieve a greater return. It’s not always true. A trustworthy financial advisor will use long standing research and time-tested strategies to give you the best chance for success over a long period. Always remember that past performance is no guarantee of future results.
Sin #5: Vanity
If you find yourself chasing past performance because you believe it determines future results, beware. When it comes to investing, returns are predominantly determined by a.) the amounts of stocks versus bonds you own, b.) the types of stocks and bonds you own, c.) your portfolio costs and taxes; and d.) most importantly, your behavior in good and bad markets. Refer to Sin #2.
Sin #6: Sloth
It’s incredibly important to keep reviewing your portfolio for new, hidden opportunities. Make sure you work with a financial advisor who is proactive. The best advisors can reduce overall portfolio costs, rebalance from stronger investment performers to weaker investment performers, all while looking for opportunities to take tax losses and minimizing tax events in an effort to enhance after-tax returns. Remember, you can spend what you make after taxes, not what you make before taxes.
Sin #7: Greed
When the markets are up, a lot of investors lose sight of the risk they are taking. Instead, they get greedy and focus on competing with colleagues or neighbors who say they are making more. Remember, the most important thing is to meet your financial goals—not make more money than other people.
At Rx Wealth, we understand investment markets are efficient and extremely difficult to beat over time. And, they’re almost impossible to beat after factoring in investment costs and taxes. Based on these factors, we developed the Rx Wealth Investment Philosophy.
Money is different from wealth. At Rx Wealth, we believe money is an account balance, but wealth is a way of life. It’s a standard for living, and one that, with the right decisions, can be achieved and maintained. We consistently strive to help our clients avoid the 7 sins to achieve greater wealth.
2020 All Rights Reserved. This content is developed from sources believed to be providing accurate information, and provided by Rx Wealth Advisors, LLC for general informational purposes only. It may not be used for the purpose of avoiding any federal tax penalties and in no way is meant to provide specific tax, legal or financial advice. Please consult legal, financial or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any financial advice or investment security.