#1 Hidden Costs

Some financial planners and stock brokers have built a business model on hidden costs. Fees are in financial products from mutual funds to annuities. A load mutual fund carries a sales charge that gets paid to the person selling you the fund, as well as a fee to market the fund to others.

Another hidden cost is a limited menu of investment options. Some professionals are linked to particular fund families and will not provide you oftentimes better investing options outside the companies they are affiliated with. Advisers who don’t sell these types of “load” products and only charge a fee for advice or portfolio management are likely a better option.

#2 Ignoring Inflation

A lot of folks are primarily invested in stocks and bonds. Some have investments in fixed annuities offering guaranteed payments for life. Whether it’s stocks, bonds, annuities, or some other investment, a big risk is often not mentioned – inflation.

Take, for example, that annuity with guaranteed payments for life. Have you done the math on what that fixed payment will buy years from now as food, energy, healthcare and other prices go up? Less than what it buys today. Yes, you can get inflation protection from the insurance company that issues the annuity, but you’ll pay a pretty price for it.

There are other ways to protect yourself through portfolio construction. Many sophisticated investors include real assets, like real estate and commodities, as part of their investing strategy to protect against future inflation. Just holding stocks, bonds, or fixed income payments may be fine if inflation stays low, but if it doesn’t, you need to protect your purchasing power.

#3 Selling Performance

The easiest way to make money for a lot of investment advisors is to sell you what is hot. If tech stocks have done well, they will sell investments in tech stocks. If crypto has done well, then they will sell a crypto investment. If people are scared, they may sell a fixed annuity or marked-up gold coins.

Recency bias is the scientific term for people tending to believe whatever has been happening will continue to happen. Your adviser is supposed to protect you against this type of cognitive bias. Many instead take advantage of it.

You may feel good owning a portfolio of investments that were doing well before you bought them. But what actually matters is how they do after you buy them. Oftentimes with investing, what is unpopular goes on to outperform what is popular.

#4 Shopping isn’t a Strategy

Imagine how the experience of grocery shopping with a five-year old is different than with a professional chef. Like a good investment portfolio, the cart of the professional chef will hold the right mix of ingredients to combine for a great meal. There is a purpose to every item, and a strategy for how each will work together. Is that what you have?

If you let a five-year old make the grocery decisions, the cart from the same store will look very different. It will be a hodgepodge of items, including whatever is popular and has the coolest packaging. Unfortunately, the latter describes the investment accounts of many folks. There is no coherent strategy. It’s more of a collection of products.

This is what Wall Street mostly is—an investment supermarket that makes money regardless of what you buy. Do you have an adviser with a strategy designed to work during times of inflation, or during down markets and other challenges? Are there parts of your portfolio designed to go up, when other parts go down? Is it more than the sum of its parts? If you don’t know your strategy and how the investments work together, it might be because you don’t have one.

#5 Reaching for Yield

2022 was the year many bond investors got a wakeup call. In 2022, the aggregate bond index was down about 15%, but a lot of bond investors did much worse. Why? Because it is easier for your advisor to sell you an investment that yields 5% than one that yields 2%.

To get more income, a lot of people own more risk than realized. Some funds use leverage, or borrowed money, to increase yields. Long-term bonds usually pay higher yields than short-term bonds. Low rated bonds pay more than investment grade bonds. And all of those have something in common – more risk.

Good advisors concentrate on total return, the combination of yield and the change in price. You may get a higher yield from a junk bond but if it falls in price by 20% you are poorer despite the higher yield. There is no such thing as a free lunch, something a lot of advisors forgot during the long period of low interest rates.

Don’t succumb to the siren song of higher yields. It is the most common mistake in investing and one our clients avoided when rates started to rise in 2022.

#6 Deceiving on Diversification

Investors sometimes think they are much more diversified than they actually are. It’s not uncommon to come across an investor holding several mutual funds, thinking they are diversified, only to learn that the funds own many of the same stocks. When they realize what they actually own, they feel deceived.

You can even suffer from a lack of diversification in a fund with 500 stocks. In October of 2021, the top five stocks in the S&P 500 represented over 20% of its value. 495 stocks could be fine but if those 5 faltered, the entire index would fall. We warned about this risk in advance of the selloff that took the index down almost 20% in 2022.

Advisors often offer the illusion of diversification but don’t take the time to research the investments they are selling. Don’t fall for it. Know what you own.

#7 Ignoring Stock Prices

If you were going to buy a business, like a restaurant, you would need some basic information. How much does it cost to buy and how much money does it make. If it cost $300,000 to buy and made $100,000 each of the last three years, that would sound like a good deal. If it cost $300,000 to buy and made $10,000 in earnings each of the last three years, then it wouldn’t be such a good deal.

But a lot of advisers and investors forget that when you buy a stock, you are buying a part of a business. A stock isn’t a lottery ticket or casino chip. It’s a share in an actual business. And what you pay is a critical factor in what you make. Today, the largest growth stocks as a group remain expensive relative to the businesses they represent.

There still are stocks available in the market at reasonable prices, that are good values and that offer high potential returns. Most advisors won’t do the work to find them but we do.