Investors: Are you Ready When the Tide Goes Out?

In my wealth management career, my clients are nothing short of bright and talented. I have worked with professors, doctors, researchers, authors, executives, business owners and rocket scientists. While many of these people are wealthy and smart, historically, they are not good money managers. They are talented and focused on their passion, but lacked the knowledge and commitment to their investments and financial planning. As Alan Gotthardt, author of The Eternity Portfolio said:

“Investing money is the process of committing resources in a strategic way to accomplish a specific objective.”

It is challenging to commit resources to building wealth without committing and research. Inevitably, investors with wealth make mistakes.

Here are the five largest mistakes made by investors with wealth. Surprisingly, most go unnoticed, costing thousands of dollars.

1. INEFFICIENT PORTFOLIO

Many portfolios are considered diversified. An allocation of 10 percent in ten different mutual funds could be considered diversified. Bear in mind, just because a portfolio is diversified, does not mean it is efficient. An efficient portfolio maximizes the return of the portfolio given a certain level of risk. An inefficient portfolio will lead to an investor taking too much risk for the return they are receiving or not enough return for the level of risk they are taking. This leads to volatility and lower returns, which impacts the accumulation in a portfolio.

2. HIGH EXPENSES

Investors continue to place accumulations in high expense investments. This is either due to a lack of understanding or working with an advisor trying to make a commission. High fees and expenses are often hidden deep in the prospectus and not apparent on quarterly statements. High expenses eat into an investor’s return, leading to lower future accumulations.

3. POOR TAX PLANNING

Many investors do not have a tax plan with their investments. Certain asset classes are more appropriate for tax-deferred accounts while other asset classes should be used in taxable accounts. Other times, tax advantaged investment vehicles are not utilized. Inappropriate investment tax planning for a future goal or a poor strategy for taking money out of investments can lead to unnecessary consequences or missed opportunities.

4. NO ESTATE PLAN

Out-of-date, inappropriate or no estate planning can lead to higher costs, delays in passing on assets and potentially higher estate taxes. Business owners top the list of individuals without the appropriate continuity plan for their business in the case of their demise. It is not fun planning for death, but necessary. 

5. LACK OF CONSISTENT MONITORING

Our situations and portfolios change over time along with tax laws, products and risk tolerance.  Portfolios should be rebalanced and adjusted over time as asset classes grow out of balance. As tax law changes, portfolio strategy may change along with which investment products are chosen.  In addition, there may be changes to estate plans as laws change.  Financial planning and asset management are not linear.

It takes time and expertise to appropriately manage investments. Investors fail to realize the opportunity-cost lost with decisions made over time. This leads to an approach that ultimately costs investors huge amounts of money and delayed financial goals. Amazingly, most investors have no idea the mistakes that were made. In the words of Warren Buffett, “Only when the tide goes out do you discover who has been swimming naked.”

Investors must make sure they don’t make these mistakes before the tide goes out.