Are you paying more than 1% in fees? That cash is most likely being debited directly from your account. Those outflows will never have an opportunity to compound for you. Check your statements--It should be clearly shown. Understand what you are paying for and how those services benefit you. There are financial professionals who will abuse naivety regarding fee schedules.
Mutual Funds, insurance products, and alternative investments often have their own internal expenses. It’s written right there in the fine print of your prospectus. You know, that giant phonebook-sized pamphlet you got when you purchased the product. The one that probably got dumped directly into the recycling bin. Those fees are also paid by you, but they’re not usually as easy to find, distinguish or quantify – even for advisors.
3. TAX OPTIMIZATION
There’s a level of complexity with tax optimization that can escalate quickly. At the very least, your assets should be in the correct account type. For example, mutual funds that distribute capital gains and are held in a highly taxed accounts should be monitored for tax-loss harvesting opportunities, while avoiding Wash Sale rules. Large market drops are often an ideal time to harvest losses while simultaneously purchasing securities recently marked “on sale.” Do not confuse this behavior with trying to time the market or panicking and selling at the wrong time. It’s simply a chance to capture the economic benefit of building carried-losses. Inaction can result in missed opportunity.
Not thinking beyond the diversification of your stocks, bonds, and cash is a big mistake and one of the most misunderstood risks in this list. Owning dividend paying stocks and having an allocation to bonds may feel secure, but your benefits could be limited, depending on the particulars. Your analysis needs to go beyond the broad categories. It’s possible that you’re duplicating the same sets of risks. For example, rising interest rate risks could end up harming your stocks and bonds in the same way.
Correlation is a close relative of diversification, but their risks differ slightly. You should identify the key levers and established relationships within the portfolio. Examine the “what ifs” with regards to adding or subtracting certain holdings.
6. HIDDEN LEVERAGE
Closed-end funds and other alternative investment categories often borrow money to enhance returns and buying power. That is what I like to refer to as a “double-edged sword.”
7. MARGIN/COLLATERAL BALANCE
When you made the decision to increase your buying power in a brokerage account and/or to secure a loan, you introduced this type of risk into your portfolio. The term “double-edged sword” can be used in this instance as well. A margin or collateral loan account has an ongoing interest expense that you are paying. A market drop (even one that’s short-term) can trigger a “call” on your margin balance, forcing you to make sales that you didn’t plan for.
8. STRESS TEST RETURNS
Stress tests are often used to help you better understand the connections and key levers in your portfolio that affect results as compared to your perceived risk tolerance. These tests are often performed with minimal detail and/or through biased lenses. It’s true, the future is uncontrollable, but that doesn’t mean we shouldn’t run tests, performed using independent technology, that predict results and make us understand how we could be financially affected.
9. PORTFOLIO CHARACTER
Portfolio character can be described by asking yourself the question, “What's this portfolio going to do when no one's watching it?” A portfolio consisting of 100% bonds in below investment-grade energy companies is probably much riskier than a portfolio containing 100% stocks of high-quality technology companies. Neither can be left unmonitored. Generally, holdings considered to have “good character” often have traits that promote good behavior, but that’s not always the case. It’s important to focus on the attributes of holdings, not their generalized categories, classifications, or fancy names.
This one’s all about YOU. Know yourself. What are your limitations? It’s unrealistic to expect an advisor to be able to eliminate human weaknesses in investor behavior. However, for those that have tested disciplines and processes, adherence to those practices can be advantageous. Consider the game of poker. If your playing style isn’t consistent, the volatility can be devastating to your game. The same goes for investing. Adopt a style, stick to it, and resist the urge to change it. “Mindset” is arguably the #1 risk your portfolio runs. It’s the toughest to control and proven to be the greatest differentiator of investment results.
The information provided is for educational and informational purposes only and does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor's particular investment objectives, strategies, tax status or investment horizon. You should consult your attorney or tax advisor.
All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.
For current Eudaimonia information, please visit the Investment Adviser Public Disclosure website atwww.adviserinfo.sec.gov by searching with Eudaimonia’s CRD #283884.