Blogs > Your Money

Dave Patterson and Erin Preston, a father-daughter team of Certified Financial Planner® licensees, provide thoughts and suggestions on a broad collection of personal finance topics.  Information provided in this BLOG is intended to be of a general nature and may not be appropriate for all situations.  Readers should consult with their own financial advisors before relying on any information contained herein.

Tuesday, April 13, 2010

Improve Your Returns by Focusing on Factors You Can Control

Too often investors spend their time focusing on the wrong things. Too many are trying to find a silver bullet or time the market. We all tend to be too impatient, especially after the down markets we’ve experienced in the last decade. We hold on to our winners to long. We hold on to our losers too long. We let our emotions get in the way of doing what’s best. We let taxes keep us from selling when it’s prudent. We do all sorts of things that are detrimental to our financial success.

It’s very tough to consistently time the market. Timing requires being right twice, when to buy and then when to sell. It very difficult to do one of these right, let alone both. Identifying the next big winner is also tough to do. About the time we read about the latest hot asset, it’s likely already over-priced. We hold on to our winners too long because were sure they’ll continue to go up and we would feel so bad if we sold too soon. We hold on to our losers too long because we’re sure they’ll recover, even when there many other investments with much better prospects. So what should we do?

We can’t control the market and we have a hard time controlling our emotions. Below are things we can control that can have a significant impact on our investing success:

(1) Find an advisor who cares about you and is motivated to grow your portfolio. How often we’ve heard people say how “nice” their advisor is or how their advisor offers to take them out to lunch or pay for a round of golf. Well it’s nice to have a nice advisor but wouldn’t you rather have a quiet, frugal one who really cares about doing the best for you. See our past article titled “Is Your Financial Advisor Acting in Your Best Interest?”

(2) Make sure you have a broadly diversified portfolio. We utilize eleven asset classes for our clients’ target portfolios. Included are cash, short-term bonds, intermediate-term bonds (including TIPs), international bonds, high-yield bonds, large cap domestic stocks, mid and small cap domestic stocks, international stocks, and real estate equities. We include a small amount of commodities related stocks as well.

(3) Rebalance your portfolio at least annually. This involves selling the over-allocated asset classes and buying the under-allocated asset classes. If you do this with discipline, it can eliminate the psychological factors that cause us to do things at the wrong time or for the wrong reason. The “typical investor” buys high and sells low. Periodic rebalancing results in buying low and selling high.

(4) Pay close attention to costs, both those of your advisor and those of the funds you invest in. If the funds your advisor recommends have an average expense ratio of more than 1%, you should look for another advisor. A hundred basis points can make a huge difference in your wealth over a twenty to thirty year period.

(5) Pay close attention to taxes. Index funds and funds with low turnover ratios will typically result in significantly lower taxes. Place dividend paying assets in your retirement accounts and growth funds in your taxable accounts (they will typically generate long-term capital gains currently subject to the low 15% long-term capital gains rate).

The above five items are things you can control if you take the time to pay attention to them. And, if you’re spending your time doing that, you probably won’t have time to spend on things you can’t control such as timing the market or letting your emotions get you into trouble.


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