If you own a portfolio of investments, this article is for you. It doesn’t matter if you’re new at investing or a veteran with years of experience. It also doesn’t matter whether you have a tax deferred retirement plan like an individual retirement account (IRA), a 401(k) plan, or a taxable portfolio. There are certain attributes that distinguish an unhealthy investment portfolio from one that is architecturally sound. What are they? Let’s analyze four symptoms.
Elevated and Opaque Costs
Investment studies have shown a high correlation between consistent market underperformance and high fee mutual funds. Moreover, other costs like brokerage trading commissions can erode returns. Finally, opaque fee arrangements with financial advisors or fund managers that make it difficult to assess the cost of investment advice are a telltale warning sign of an unhealthy portfolio.
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Excessive Risk Taking
Whether it means over-concentrating money in one security or relying on leverage, unhealthy investment portfolios have a common shortcoming; they take risks that are abnormal and unnecessary.
Although some people – especially experienced investors – may feel comfortable with taking more investment risk, it doesn’t mean they should or that there won’t be adverse consequences.
Being Devoured by Taxes
Unhealthy investment portfolios are not built to deliberately minimize the negative impact of taxes. Whether that means owning tax unfriendly investment products, engaging in poor asset location, or having ill-timed asset sales, unhealthy portfolios invariably expose their owners to unwanted tax liabilities.
Despite a favorable stock (NYSEARCA:SCHB) and bond market (NYSEARCA:AGG) climate over the past several years, many investment portfolios that I’ve analyzed and graded, are still lagging behind key market indexes and the ETFs tracking them. It’s disappointing to see so many Portfolio Report Cards with unsatisfactory grades. What’s wrong? Performance problems point to major portfolio design flaws.
Contrary to what the public has been brainwashed to believe, a healthy portfolio isn’t necessarily the investment account that owns the hottest stocks or funds.
In the end, recognizing and avoiding the attributes of an unhealthy portfolio can mean the difference between investment failure and success. I hope you succeed.
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