It’s been said that the average person spends more time each year planning their vacation than they do planning their finances. When you think about that, it’s truly a sad statement. You work all of your life to save money for retirement, yet most people spend very little time learning about how their money is being managed.
Throughout my 24 years as a full-service financial advisor, I saw plenty of mistakes that the average investor made. Most of the more astute investors avoided these mistakes because they asked the right questions and spent time understanding how they wanted their money invested.
These 5 mistakes are best avoided if possible:
1) Not asking the right questions when hiring a financial advisor.
Be careful of judging a financial advisor by “likeability”. I know financial advisors who can “wow” you with charisma but are dumber than a bag of rocks. You are about to trust someone with a portion of your life savings so it’s not a likeability contest, it’s about capability. Does this person have the right experience and smarts to help you achieve your goals? How do you find out? You’ve got to ask the right questions.
Here are a few I’d start off with:
Are you a fiduciary?
How do you get paid?
1) Are you commission based?
2) Are you a fee-only advisor? If so, can I see your fee schedule?
3) Do you charge by the hour?
How often can we expect to hear from you?
How long have you been an advisor? Do you specialize in a certain area?
How much money do you manage now?
What is your product mix? Do you mostly do fee-based portfolios? Do you sell mostly annuities?
Your goal is to find the right balance between relationship and capability. You want to be comfortable with an advisor that can provide the best solutions available.
2) Not staying involved with your money.
Too many times the average investor will hire an advisor and just put their money on autopilot. Big mistake. This is your money and you need to stay involved. The best way to learn is to ask questions, monitor your accounts and be active in the decision-making process.
I see this all the time with DIY investors where they just keeping tossing money into the same two mutual funds. Take some time to do some research to see if there are some better options out there. I’ve always preached that “Nobody cares more about your money than you do.” and that is a fact (or should be). Is your advisor looking at your account every day? I can assure you no. Weekly? Probably not. Keep in mind, you are not your advisor’s only client. You are just one of many.
It behooves you to keep a close and personal relationship with your money. Take it off autopilot and get involved.
3) Not understanding the Fees you are being charged.
In the investment world, you can certainly say that there are no free lunches. Some fees are obvious such as when your advisor tells you that they are going to charge you a 1% fee to manage your money in a model portfolio of mutual funds. Now what they probably won’t tell you is the mutual funds inside of that portfolio are going to charge you more fees. Those fees range but can get as high as 1.25%, or higher.
The advisor is not always to blame on this. I prided myself on taking complex products and explaining them so a 12-year-old could understand them. I’d discuss the risks, the potential rewards and the fees – both the obvious and the hidden. It amazed me the number of folks who were about to invest a significant amount of money and simply were not “present” in that conversation. If I asked, “Explain to me what I just said?” I’m sure a good number of them would not be able to because they just weren’t paying attention.
The fee’s that you pay can really add up over the years. Know what you are paying. Ask if there are any hidden fees. Get online and do some homework yourself. If you spend a little time doing some research, you might be astonished on how much you are really paying.
4) Getting emotional over the stock market.
Nobody likes to experience a big downturn in the markets. I’ve had clients in the past who tried to time the market. They panicked and got out at the bottom and missed the recovery. Regardless of how hard I tried to keep them from making that mistake, they still made it. Everyone’s goal is to buy low and sell high not sell low and buy high, yet they become dead set on making the move.
If you can’t stomach the ups and downs of the markets, then you shouldn’t be investing in it. If you are 35 years old and your 401k just dropped by 30%, sure it’s a concern but it shouldn’t be a big one because you can’t take the money out for another 24 years and it’s likely to bounce back. Now if you are 60 years old and about to enter retirement, then a 30% drop is very concerning. (See #5 below)
Try to keep your emotions out of investing. Your advisor can help you with this. If you are a DIYer, think of it like a business decision and take the emotions out. If you’re not sure what to do, it’s worth the money to hire an expert to help you out. Take a few days before making a decision that could cost you a lot of money in the future. A clear mind will lead you down the best path.
5) Not adjusting your portfolio as you get close to retirement.
There are two stages of investing: The accumulation stage and the distribution stage. While you are working and contributing to your accounts, you are in the accumulation stage. You take more risks and seek out growth. When you retire, you’re now in the distribution stage. You need your money to be an income source.
The investment style that got you to retirement – investing in growth and being more aggressive – might not be the best way to invest in retirement. The mistake I see is that folks do not adjust their portfolios when nearing retirement or once in retirement. Staying more aggressively invested could become a real problem if the market takes a big dip early in your retirement. I’d suggest taking a hard look at your portfolio once you are around three years away from retirement. A tweak here and there can help you adjust the amount of risk you are taking as well as help you start converting your holdings towards being more income producing.
One of the best investments you can make is learning about investing. Stay involved in the decision-making process, learn the Fees and pay attention to your holdings. Believe me when I tell you “Your money and your future self with thank you for it.”
Live free my friends,
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Investment Advisory Services offered through Shankland Financial Advisors, LLC, Registered Investment Advisor