Since mid-May, I, along with a growing army of independent portfolio analysts, have already graded $10.6 million in investment portfolios. Some of the individual investors are old, some are young. Some have years of investment experience and others are novices. Some are risk averse, while others are not.
I’ve analyzed 401k plans, traditional IRAs, Roth IRAs, 403b retirement plans, 529 college savings plans, UGMA accounts, family trust accounts, and anything posing as an “investment.” Regardless of how large or small the account size, there are common denominators among individual investors with disorderly portfolios.
What are they?
Sign 1: Too Many Investment Accounts Located Everywhere
There’s nothing wrong with having investment accounts held at different brokerages or financial institutions. It diversifies your assets and risk away from one single entity. Think about it: If you have multiple accounts held at multiple firms and one of them goes belly-up, you’re in a much better situation compared to the poor soul who kept all their money in custody at the defunct institution.
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But some investors have taken the idea of having multiple investment accounts to new extremes.
For example, I recently graded a taxable investment portfolio for a 45-year-old business owner in New Jersey. It was one of nine different investment accounts he held at several different brokerages. Instead of consolidating some of his investment accounts to make managing them easier, he felt it was better to be haplessly scattered about.
Needless to say, his poor Portfolio Report Card grade of “C” on just one of the portfolios I graded, reflected his disorderly approach. Good organization with your investment accounts is mandatory.
Sign 2: Building on the Wrong Foundation
A home without a solid foundation won’t survive very long. A little rain and wind will easily cause it to collapse.
Many investors have erringly built the foundation or core of their investment portfolios on the wrong ground; Non-core asset classes. Non-core assets include derivatives, currencies, hedge funds, individual stocks, private equity and venture capital. These particular asset classes are regularly featured in media headline stories and have nothing wrong with them, but they should only supplemental to a successful core portfolio, which should consist of core asset classes like stock (VT), bonds (BOND), commodities (DBC), real estate (VNQI) and cash.
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Building your portfolio’s foundation on non-core asset classes without first completing the construction of your portfolio’s core is backwards. It’s like attempting to construct the attic of a home without having enough sense to finish the first floor. It’s illogical and self-defeating.
Sign 3: Seeing Only What You Want to See
Myopia, also known as nearsightedness, causes the human eye to only see at a close distance. In a similar way, myopic investors are unable to see the big picture of what’s really going on with their investment portfolios because they’re too focused on the individual parts or holdings within their accounts.
Earlier this week, I spoke with an investor who wanted me to only focus on two of his existing holdings: Yahoo (YHOO) and General Motors (GM). He didn’t want me to examine the entire portfolio. He also didn’t want to discuss the $250,000 bath he took on gold (GLD) in 2013, nor was he able to produce organized account statements. He said, “I only want to focus on the future of my investments, not the past.”
Good as that may sound, an investor can’t know where he’s heading if he doesn’t know where he has been or is presently.
What are the strengths and weakness of your portfolio? Ron DeLegge’s Portfolio Report Card challenge stands: If your investment portfolio scores an “A,” Ron will pay you $100. Ron grades family trust accounts, 401(k) rollovers, 457 plans, 403(b), UGMA accounts, and anything posing as an “investment.”
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