December 2017

Counting Down the Worst Financial Mistakes: Mistake #4: Focusing on Returns

Author: Brenda Blisk

Chasing performance is one of the biggest errors made by investors. If you take the time to study past performance, you will discover that it is not a reliable way to predict future winners. The growth stocks that were popular in the ’90s had been churning out double-digit returns for several years, when they suddenly went south, taking many investors’ portfolios with them.

The lesson here is that if a particular asset class has outperformed for three or four years, you can know one thing with certainty: You should have invested three or four years ago. Often, by the time the average investor has decided to invest, the “smart money” has already gotten out while the not-so-savvy money continues to pour in. Don’t be a day late and a dollar short making this mistake.

Not only do many investors pay the timing penalty, they may also pay a penalty for having too much risk in their portfolios. During the bull market days of the late 1990s and early 2000s, money poured into equities, often into risky tech and Internet stocks. The boring “value” stocks trading at low earnings multiples saw many of their investors fleeing towards higher returns. However, during the terrible bear market that followed 9/11, many of those “boring” value stocks weathered the storm, while the bottom fell out of the technology stocks. Investors who took on too much risk, not wanting to miss out on the dotcom boom, most likely saw their portfolios take a severe beating.

One of the major differences between amateurs and investment professionals is that the professionals seek to understand and manage portfolio risk. Prudent investors consider the risks contained in an investment position and cut down their position and market exposure if they determine that their portfolio contains too much risk.

Portfolio risk can be insidious. You might think that by holding a diverse mix of stocks, bonds, and alternatives that you are adequately managing your risk, but it’s very possible that your investments are correlated and may react to a market decline in the same way. One of the best services an investment professional can provide is a clear-eyed evaluation of risk and an asset allocation structure to manage it while still helping you pursue your goals. If you are concerned that your portfolio may carry too much risk, please feel free to contact us for a consultation.

Today’s market is volatile, and investors are playing it safe, fearful of losing portfolio value. However, a portfolio containing too little risk can leave you feeling safe but sorry as you miss out on the important market rallies. During periods of turbulence in the markets, many investors tend to flock to low-risk investments like U.S.

Treasuries and cash. This aversion to risk can have potential adverse effects on long-term investments, as too many fixed-rate investments put a cap on your portfolio’s upside and dampen performance. Inflation is a serious concern in long-term investing, and too little growth in your investments can leave you with a shortfall in your retirement years.

In a reaction to 2012’s turbulent markets, investors pulled more than $28 billion from U.S. stock investments, even as the S&P 500 rallied more than 18 percent. It’s not hard to see why wary investors want to take a more cautious approach, given economic turmoil and the cloud of uncertainty surrounding taxes. However, by trying to reduce the chances that their portfolios will suffer large losses, investors may be trading one type of risk for others, including inflation risk, high valuations, media risk, and greater-than-expected volatility.

For many investors, hunkering down in safe haven investments is a luxury they simply can’t afford. With inflation eating away at cash every year, most investors need at least some growth-oriented investments.
To know whether you should be taking on more risk, it’s important to speak with your financial professional and ask yourself the following questions:

• Do I have enough growth-oriented investments in my portfolio?
• Can I afford to take short-term losses for long-term gain?
• Could I afford to live on Social Security or other income in the event my accounts decline in value?
• How comfortable do I feel taking on more risk to potentially achieve higher investment returns?
• Could I live on my investments without taking on additional risk?

Call today for a free portfolio analysis and consultation: Blisk Financial Group (800) 262-3458 or BFGService@spireip.com.

Spire Wealth Management is a Federally Registered Investment Advisory Firm. Securities offered through an affiliated company, Spire Securities, LLC a Registered Broker/Dealer and member FINRA/SIPC.

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