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| Adrian Mastracci, president of KCM Wealth Management, says “Portfolio makeovers can provide value to many investors. For example, those with too few investments. Those with too many. Those light on fixed income. Those who have retired." |
Vancouver, BC (December 5, 2005): Investors may require portfolio makeovers for a variety of reasons. All too often, this exercise becomes mainly a glimpse at past performance.
In the sage words of Warren Buffett, “I don't look to jump over 7-foot bars. I look around for 1-foot bars that I can step over”.
Adrian Mastracci, “fee-only” investment counsel at Vancouver based KCM Wealth Management comments, “Portfolio makeovers can provide value to many investors. For example, those with too few investments. Those with too many. Those light on fixed income. Those who have retired.”
I’ve noticed that many investors have become preoccupied with performance in a big way. I know that falling in love with performance is easy. Too often, it seems that nothing else matters.
Today marks nine years since Alan Greenspan’s famous “irrational exuberance” speech. Frankly, there is a touch of irrational exuberance in many investor expectations of portfolio performance.
Lately, the stakes have been raised a notch to the outperformance level. Every money manager’s dream is to outperform. It feels like performance on steroids, or jumping over those 7-foot bars.
It’s very tempting for investors to want to outperform and cross the finish line quickly. Of course, without incurring the wrath of additional risks.
The fixation with performance typically results in portfolios full of yesterday's winners. This is an excellent strategy on how to lose money when the sparkles come off. And they do.
That investment scenario is a harsh lesson to learn and accept. Thankfully, much of this grief can be avoided with a portfolio makeover. One that takes into account the fundamentals of investing.
There is more to managing portfolios than hot performance. Much more. Let’s look for a few 1-foot bars to step over.
1. First the expectations
Focus on what you want your nestegg to provide in the long-term. Confirm that your goals are reasonable and you’re on the right track. Your advisors should be asking the same questions too.
Refresh the desired retirement income. Estimate the portfolio size required when you get there. Calculate the investment rate of return you need to reach your goals. Treat this rate of return as the minimum yardstick for the portfolio. Not what the markets do.
2. Asset mix
Asset mix decisions have the biggest impact on your portfolio outcome. Four major asset classes are equities, fixed income, cash and real estate. Choose a sensible asset mix so that the holdings don't all move in the same direction. Most seem comfortable with 40% to 60% in equities.
Once your asset mix targets are determined, stay within the appropriate guidelines. Occasional rebalancing assists as markets drift. Sell overperforming assets and buy underperformers.
3. Diversify, diversify, diversify
Successful investing is much about designing a well diversified portfolio. One whose outcome does not hinge on any investment hitting a home run. Question the wisdom when a single investment, say a stock, is worth more than 5% of the portfolio. Be extra careful with the employer stock.
Let’s be clear. It does not matter how rosy the prospects may appear for any investment. It is not prudent to bet a large part, or all, of one's portfolio on the fortunes of very few investments. This could result in a mess that seriously impairs the game plan, particularly retirement.
4. Risks matter
Examine all your portfolio risks. Don't just get infatuated by the upside investment potential. Unthinkable as it may seem, assess the downside of anything you are considering. The question is whether you can stand the reality of that star investment becoming a total disaster.
This is tough. Assume that some investments will disappoint and become terrible picks. One more reason to ensure that no investment can adversely affect you in a significant way. Also, remember that one does not have to invest everything all at once. Taking a year or two to implement the portfolio is quite acceptable.
5. Fees and expenses
Get familiar with the layers of fees and operating expenses. Both the invoiced and hidden ones. Management expense ratios, front loads, deferred sales charges, trading commissions, audit fees, custodial fees, legal fees, filing fees, transfer fees and redemption fees – to name a few.
Ask all your advisors the tough questions. Such as what they are paid from the investments, both now and in the future. Their answers should flow easily.
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These five steps are fundamental to investing success. They deliver value, year after year.
Treat the portfolio to a makeover with lasting substance. Consider these easy steps as best friends. The wisdom of stepping over the 1-foot bars will be a delight.
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