Knowing Enough About Your Investments To Be Dangerous

Knowing Enough About Your Investments To Be Dangerous

February 22, 2019

By Jeremy Reif, CRPS®, Financial Advisor and Owner of Point Wealth Management

We live in a do-it-yourself society. With online courses, webinars, blogs, and a plethora of information available everywhere you turn, it’s easy to think that you have everything you need to manage every aspect of your life on your own. But be careful about having that mindset with your finances.

When you know enough about your finances to be dangerous, you could get into some tricky situations. Don’t take my word for it; DALBAR, one of the most trusted companies when it comes to studying investor behavior and returns, found that the biggest reason for underperformance by investors is their decisions. Behavioral biases lead to poor investment decision-making, and the average investor underperforms the market year in and year out. (1) You might be trying to save a buck by being a DIY investor, but in the end, does this save you money or cost you money?

Shifting Your Perspective

I understand that it’s difficult to ask for help, no matter what situation you are in. Whether we are looking for a specific product at a store or trying to figure out a new computer, it’s in our nature to turn down assistance even if we truly want and need help. It’s the same with your money. When you enter your working years and start putting money aside for the future, your balance is usually pretty low. You may feel like it’s not worth asking for help or that you would be wasting a professional’s time. Or, if you do turn to a financial advisor initially, you may just “set it and forget it,” ignoring your accounts for the next 30 years. But as your money grows, so does your risk.

The More You Have, The More Risk You Face

Let’s look at a hypothetical scenario. Early in your career, you might start out by contributing $100 a paycheck into a retirement account. Pretend for a moment that the markets perform well and the investment selected nets a 10% return. For your purposes, that’s a $10 growth. Now imagine your account is valued at $1 million. A 10% fluctuation either direction is a difference of $100,000. Therefore, playing around with your investments carries a much higher risk, one you might not be willing to take.

The fear of investing typically comes into play when people have a significant amount in their portfolio and get closer to retirement. This is when they begin to wonder if they should work with an investment advisor. In this situation, people tend to fall into two categories:

A. Those who know they can’t continue to ignore their portfolio and do not feel comfortable monitoring their own investments. These people know their limits and respect the advice of a professional and will usually work with an advisor as soon as they can.

B. Those who feel they should keep their costs down and do things themselves. They figure that if they keep a watchful eye, then they will be fine. They tend to monitor their finances from their cell phones, computers, or tablets.

There is some truth to the thinking of option B because being a DIY investor is not always dangerous. This is why some mutual fund companies have done so well over the years. The difference between being dangerous or not lies in the value of the advice you receive. If you are getting bad or mediocre investment advice, keeping your costs down plays a huge role in your rates of return. But if you are receiving great advice, it’s a different story.

What DIY investors tend to forget is that the investment selection is one piece of the puzzle. Yes, a good portion of your return comes from having the proper asset allocation, however, a good advisor is doing far more than just picking investments and looking at costs. Top-notch advisors also take care of financial planning, making suggestions about tax strategies, risk levels, investments that are suitable for each client, etc.

The Issue Of Timing

Let’s go back to our example. Imagine that person is now 60 and planning to retire at age 62. They were fortunate enough to put away a nice amount of money and it has grown to the $1 million mark. The stock market experiences a pullback of 10% one month before their hoped-for retirement date and their portfolio is now $900,000 in the blink of an eye. Does this change anything?

The reality is, some professional planning and advice could have helped those folks change their course of action the closer they got to their retirement date. As an oversimplified example, let’s say they completed a financial plan when they were 60. The plan suggested that if there was $1 million in investments that there was enough money to retire at age 62 with zero growth on the money. An advisor might have suggested they reduce their market exposure and protect their $1 million as there was no need to take a high level of risk. When the market dropped, they may have lost a bit, but not as much as they did.

The Value Of A Plan

A little planning goes a long way and potentially could be worth every penny. With retirement on the line, I find that many folks desire to have a second opinion of what they are currently doing, especially if they plan to continue taking care of things on their own. They do this first to find out if the course that they are currently on gets them to where they want to go financially and, second, to see if there are any improvements that would benefit their situation.  

I’ve found that the biggest concern DIY investors have is the fear of turning over their assets if they commit to a financial plan with an advisor. This concern couldn’t be further from the truth. When you pay for a plan, the advice you receive should be coming from a fiduciary who is working in your best interest. If you are clear about your expectations and want to continue to manage your finances by yourself, your advisor should build a plan tailored to your DIY journey. They may show you different options or alternative ideas to your personal approach to cover all the bases of being a fiduciary, but your plan is your own; it should be built for your specific situation.

We’re Here To Help

Have you ever wondered if your plan is on the right track? With no strings attached, we at Point Wealth are here to help you and point you in the right direction. Schedule a call and meet me virtually if you’d like help determining what path your current plan is on.

About Jeremy Reif, CRPS®

Jeremy Reif is an independent financial advisor with more than a decade of experience in the financial services industry. He is also the owner of Point Wealth, LLC, an independent financial planning and investment management firm. With advanced credentials and training in retirement planning and financial planning, Jeremy focuses on helping individuals and families pursue financial independence. Regardless of the services he’s providing, he focuses on talking openly about financial planning, the industry, common questions about retirement planning, and more to help everyday investors gain more confidence in their financial opportunities. Based in Wausau, Wisconsin, Jeremy serves clients throughout the state and can work virtually with clients throughout the country. To learn more, visit http://pointwealthmanagement.com and connect with Jeremy on LinkedIn.

Investment Advisory Services offered through Retirement Wealth Advisors, Inc. (RWA) a Registered Investment Advisor. Securities offered through TCM Securities, Inc. Members FINRA-SIPC. Point Wealth Management, TCM, and RWA are not affiliated. Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance. Past performance does not guarantee future results. Consult your financial professional before making any investment decision.

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(1) http://www.advisorperspectives.com/commentaries/20150408-streettalk-live-dalbar-why-investors-suck-and-tips-for-advisors

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