Investing is a risky proposition – stocks rise and fall, bond yields strengthen or weaken and sitting in cash can hurt investors. To combat this, people put together a portfolio that should grow and withstand the ravages markets endure. Even the most well-meaning investors can have hidden risks in their portfolios. Here are some tips for you to use and find out how much risk you’re exposed to.
1. Keep it in context
You probably check your investment statements every month to see how your portfolio fared. Our tip? Check your return against a benchmark that closely aligns with your investments. For instance, if you are heavily invested in tech and its related industries, you’ll want to compare your returns for the month against the Nasdaq for the same time frame.
Is your bond portfolio risky, aggressive or too safe? Many investors like bonds and bond funds for their yields and will chase them for that yield. Sometimes those bonds with great yields are the ones that carry the highest risks. This is because they often contain junk rated bonds or international and emerging market bonds. Do your homework and find out exactly what is in the bonds and bond funds you’re interested in.
3. Watch all your statements
Your advisor should be sending you detailed statements about your investments every month. Likewise, the custodian of your account should be, also. The custodian is the organization that actually holds your money and executes trades. Compare these two documents and make sure the numbers match. If you have any questions, ask both entities. They should be more than willing to answer and explain technicalities.
4. Look for conflict of interest
Although it isn’t as common as it once was, conflict of interest with advisors still happens. This is when the advisor gets a higher compensation for selling some investment products over others. It could be that those are the right places for you to invest, but you definitely want to know ahead of time what the compensation structure is. The more up-front your advisor is with you, the fairer it is for everyone.
5. Know the fees
This is especially true for mutual funds. Look at the expense ratios over time – the cost of owning the fund and its rate of return. Like individual investors, funds incur costs when they buy and sell securities. This is why funds with a low turnover, and therefore lower costs, could be better than a fund that has a high turnover. Those funds with high turnover rates can also cost you at tax time, especially in the form of short-term capital gains.
When people had pensions to retire on, they didn’t have to look for these risks because the pension manager took care of it all. Now, with more people having 401(k)s as their retirement, they have to pay attention to all the details. To help identify these and other hidden risks that might exist in your portfolio, speak with your investment advisor. Not only will they help you set up a plan and a strategy for executing all phases of that plan, they help you protect your wealth as you work to make it grow.
Securities offered through Triad Advisors Member FINRA/SIPC
Advisory Services offered through Meyer Wealth Advisors
Meyer Wealth Advisors is not affiliated with Triad Advisors