Investor Horror Stories: How To Avoid Being Scared By Your Own Portfolio

WalletPop Editor

investing tips so your portfolio doesn't scare you to death

By Robert Stammers, CFA
Director of Investor Education, CFA Institute

With Halloween around the corner and the frightening market conditions of late, here are some tips to help keep your portfolio off life support.

Have a possessed portfolio? Hire a financial exorcist
Do you find your portfolio doing unexplained, even paranormal things? While we all like to think we can keep our cool under stressful conditions, the reality is that emotion associated with turbulent markets can often cloud our judgment when it comes to making investment decisions. The best way to manage this is to hire a professional financial advisor who can provide you with sound, objective investment advice. In addition to finding an advisor who is a good personal fit, look for an investment professional with strong credentials, such as the Chartered Financial Analyst (CFA) designation. These individuals are in a better position to help keep your emotions in check and provide guidance so your portfolio and financial goals stay on track for the long-term.

Trick-or-treat? How to avoid overcommitting to a single asset class
Whether investing in real estate, stocks or bonds, it's easy to believe there's a single asset class that will provide growth and security for the long-term. However, the reality is that diversification through proper asset allocation is the best way to manage financial risk, unpredictable markets, and other unexpected events that may come your way, as no one can predict with certainty how a single asset class will perform. Bottom line: avoid being tricked into an investment decision that could turn into a horror story.

MER-derous Fees
Unexpected fees jumping out at you can make investing in funds feel more like you're starring in Friday the 13th rather than simply trying to reach your long-term financial goals. While one per cent sounds like a miniscule fee increase, it can have a large negative impact on your overall wealth in the long-term. Even if you were able to earn the same annual inflation-adjusted return as the S&P 500 has since 1912 (6.6%), those fees would reduce the value of a $10,000 investment by $1,704 over ten years. That's nineteen percent of the profits that you would earn over that period. So while that small percentage doesn't sound like a lot, compounded over time, you could end up burying almost a fifth of your profits in the financial market graveyard.

Be wary of zombie assets
Deciding when to cut your losses is a difficult decision that can spook even the most experienced investor. Acknowledging when your investment is a zombie-more dead than alive-is key to maintaining a healthy portfolio. Many of us have neither the time nor the technical expertise to manage and monitor our portfolios on an ongoing basis. Don't shy away from finding an investment advisor who can help you make decisions objectively and provide you with counsel regarding when to sell a dying asset.

I Know What You Invested In Last Summer
At one time or another, many of us have considered joining in on the latest financial fad, but such fickle investing can wreak havoc on your investment strategy, your portfolio performance and can quickly turn from dream to a nightmare. While niche investments may be relevant for some portfolios, an investment professional can help you determine what product - from ghoulish hedge funds to ghastly collateralized debt obligations, and downright devilish derivatives – fits with your risk tolerance and time horizon.