Investment Fees Arent as Important as Some May Think: Four Ways to Really Evaluate Your Portfolio
With the recent spotlight on unethical fund managers, its easy to understand why investors are concerned about their mutual fund portfolios. And its likely youve heard a vocal group of advisors shouting that high fees need curbing. But heres the real truth: if you are not careful, there are even bigger predators out there waiting to devour your retirement savings. Follow these four tips and you will avoid many of the common pitfalls investors make with their money.
(PRWEB) February 28, 2005 -- With the recent spotlight on unethical fund managers, its easy to understand why investors are concerned about their mutual fund portfolios. And its likely youve heard a vocal group of advisors shouting that high fees need curbing. But heres the real truth: if you are not careful, there are even bigger predators out there waiting to devour your retirement savings. Follow these four tips and you will avoid many of the common pitfalls investors make with their money.
Tip#1: Determine Your Required Retirement Rate-of-Return. This is the primary variable your investment philosophy should be based on. Once you understand this number, the process of investment selection becomes much clearer. For example, if you need an average annual return of 7% - 7.5% to achieve your retirement goals, you should probably not have a majority of your assets in bonds. Yet, a lot of investors do just that -- invest in asset classes that give them little to no chance of achieving what they really need. Make sure you are not living a 7% lifestyle on a 5% portfolio; this is "going broke safely."
Tip #2: Determine Your Portfolios Expected-Average-Return. This concept is simply a continuation of Tip #1. Comparing your required rate-of-return with your expected-average-return to will help you weed out the waste in your portfolio. Is the expected-average-return higher or lower than the return you need each year? Each holding you have should either add to your expected return or reduce your portfolios volatility. You may find some of your assets doing the opposite of what you expected them to do. If the expected-average-return number is less than the required rate-of-return you calculated in Tip #1, you need to take steps to modify your holdings until the two numbers match up.
Tip #3: Calculate Your Portfolios Standard Deviation. What is your portfolios risk? This is generally one of the bigger culprits of portfolio inefficiency, mainly because most investors dont understand it. Risk is like that estranged family member you never hear about and everyone ignores at the family reunion. Ignoring your portfolios risk can be one the costliest mistakes you can make. Having a risk factor higher than necessary means your odds of actually achieving this return drop dramatically. Using the target portfolio above of 7% - 7.5%, you shouldnt have a portfolio standard deviation of more than 15 or 16. Use online tools (like those available on www.Morningstar.com) to help calculate these figures for your own portfolio.
Tip #4: Find out if your Fund Manager is Style Drifting. Style Drift is what happens when your fund manager starts buying stocks outside of the stated investment philosophy. For instance: a mid-cap manager who starts buying small-cap stocks can be guilty of Style Drift. Because you arent generally made aware of this, it can end up costing you in either lower return or higher risk in your portfolio. If you have an advisor, ask if he/she monitors style drift with your fund managers. Otherwise, check your funds stated Morningstar category against the annual report the fund manager supplies each year.
All four of these tests can be done in conjunction with your funds fee analysis. Just dont focus on fees alone and expect to have a finely tuned portfolio working for you. Ideally, fee analysis should be done only after you have completed the steps above; you will naturally filter out a lot of investments you may have considered before. Once you complete the four steps, set an automatic reminder so that you are sure to perform an annual or even semiannual review.
Remember, even the most detailed investment analysis can become outdated in a very short period of time. While fees are an important inconsideration in your portfolios design and ongoing management, theyre not the only factor to consider.
About Strategic Financial Consultants, Inc.
A full-service financial planning and wealth management firm, Strategic Financial Consultants, Inc. helps retirees and small business owners chart their course to financial independence. By using a comprehensive Wealth & Income Planning Process, we address all aspects of our clients financial well being to help them achieve their retirement goals. To schedule a Portfolio Analysis, call 407-467-5187 or send email to Chris Becks, Registered Financial Consultant, at "info@strategicfinancialria.com."
Contact:
Christopher Becks, RFC
President, Strategic Financial Consultants, Inc.
407.467.5187
"chris@strategicfinancialria.com"
# # #
Bookmark -
Del.icio.us |
Furl It |
Technorati |
Ask |
MyWeb |
Propeller |
Live Bookmarks |
Newsvine |
TailRank |
Reddit |
Slashdot |
Digg |
Stumbleupon |
Google Bookmarks |
Sphere |
Blink It |
Spurl
|
