I am certainly not complaining about my portfolio’s performance last year. It was a welcome change from the erratic and plunging markets we had all endured since the recession began, but as I begin to dig though my investment performance in anticipation of tax time, I think it is a good opportunity to reflect on the mistakes I made so I don’t repeat them again. Here are a few tips that might save you some money:
- If you are getting financial advice, work with money managers, not salesmen. My good friend, attorney, and fellow blogger Milt Stewart always offers the following advice when people ask how to hire a lawyer; hire the lawyer, not the law firm. I think this is similarly good advice when looking for a financial consultant. Make sure you are working with the person who actually manages your money, and not just a big firm. Over the years I have worked with a variety of financial consultants from firms of every size, and I have found they tend to fall into two categories; managers and salesmen (even though the salesmen would never tell you it is their job to sell). While your account or portfolio manager (or whatever they might call themselves) certainly wants to see you do well in order to maintain your business and grow your fees, they also might be under a lot of pressure to hawk whatever their firm is selling. This could be their own brand of mutual funds, or worse, exotic and hard to understand products that are likely laden with fees for the company. Through trial and error I have largely eliminated the salesmen, and for the managed portion of my portfolio I now work directly with people that actively manage my money and are accountable based on performance. Sure, I might have an account rep that helps service my account and is a valued part of the team, but I have direct and frequent contact with the person doing the investing. The big losers in my portfolio in 2010 were both holdover positions that had been sold to me by salesmen more interested in commissions than the health of my portfolio. In the worst case, a salesman from US Bank Private Financial Services convinced me to buy a Hedge Fund several years ago that practically went bust, is in violation of their contracts, and has to pay me off in a little at a time, most likely with a 10-15% loss and a very long tie-up of my capital. In another case, a salesman from Credit Suisse convinced me to by a ‘basket of indices” five years ago that finally redeemed in 2010 – touting the incredible combination of safety and return. I lost 20% on that wonderful investment when it redeemed last year. The only ones to make money on the investments were US Bank and Credit Suisse. This would lead me to my next point….
- Buy what you understand and can track. I was foolish to buy both these investments, because I did not really understand them, and their underlying value was very hard to track. In fact, I thought the basket of indices was doing OK until a few weeks before its redemption, as the value was only occasionally calculated. Now I make sure that the large majority of my portfolio is in marketable securities held in my name with values updated daily. I take great pleasure in my “daily download” that tells me everything I want to know about my portfolio. And I avoid any “Bernie Maddox” potential situations because I own the securities, and don’t have to depend on some unverified third party to tell me what my investment is worth.
- Don’t diversify too much, and watch the fees. As I analyzed the portion of my portfolio I manage, I realized that last year I was often too diversified, sometimes paying double fees for the same market exposure. As I have stated in this blog previously, most investors would be best serviced with a proper allocation of low cost index funds as opposed to pricey funds or individual equities. After analyzing the fees and returns of some of the mutual funds I owned, I have been selling them off and replacing them with Schwab index funds that offer very similar (and sometimes better) performance, with no transaction fees and tiny expense ratios. Most investors fail to realize how the combination of fees and expenses can really impact their returns.
Simplicity, common-sense, and transparency are the best ways to make money in today’s often nasty financial world.