So many investors plod through life hoping they are making prudent decisions but never really certain. Given today’s overwhelming landscape of financial products, services and conflicting advice it’s no wonder investors remain in a state of semi-anxiety and confusion. In the spirit of keeping things simple (always as good practice) it may help to ask yourself a few questions - (1) Do you know what you own? (2) Why you own it? (3) How you are doing? (4) How much you are paying? Surprisingly, most investors cannot answer even one of these questions with confidence.
What do you own? It is not uncommon for investors to wake up one day and realize they have no idea what they actually own. Their portfolio is a hodge-podge of securities purchased over time for one reason or another that sounded good way back when. However, they have long since forgotten each investment’s specific merit and worse, may unwittingly own a portfolio that is no longer properly diversified and which underperforms on a risk-adjusted basis.
Why do you own it? Every investment in your portfolio should have a specific purpose and complement one another, much like the various tools in a builder’s tool box are each designed to perform different functions and all needed to construct a well-built home. Carefully selected investments should result in an optimal portfolio – that being the appropriate balance between risk and return and a function of your goals, objectives, risk tolerance and liquidity needs. Everything you own should be dedicated to helping you achieve your goals and objectives which are the very foundation of your plan.
How are you doing? Do you know how you are doing relative to the risk you are incurring? Do you know if your performance is the result of skill or luck? Do you know if you are on track to achieve your goals and objectives? If not, why not? How much are you paying for your financial products and/or services? Do you truly know your total costs and if those costs are competitive? Are there any hidden fees and expenses or revenue sharing arrangements which can create conflicts of interest in the advice you receive? To quote Vanguard founder John Bogle, “Performance comes and goes, but costs go on forever.”
If you don’t know the answers to the above questions you may be leaving too much of your financial outcome to the whims of fate. Someone should be tasked with the responsibility of managing your portfolio within the context of a well-designed plan and then held accountable for the results. That person should either be you (if you have the time, expertise and emotional detachment) or an experienced professional to whom you have delegated that authority. Remember, successful investing is simple but nothing about it is easy.