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River Hill Magazine: Five Common Investment Mistakes to Avoid

 

  1. Taking Excessive Risk

Many investors gravitate toward investments offering the highest potential returns while ignoring the associated risks.  If your investment loses 50% of its value during a bear market, it will take a gain of 100% just to return to break-even status.  The goal of a well-diversified, balanced portfolio is to reduce market risk while earning steady, consistent returns over a long time horizon.  Minimizing losses during downturns generally produces higher average compounded returns over a long time horizon.

 

  1. Using Stocks to Meet Short-Term Cash Needs

Funds that are needed to meet a specific financial goal in less than a three-year period, and perhaps longer, should not be heavily invested in stocks or stock funds.  Examples of goals are a car replacement, the down payment on the purchase of a home, or even plans for a major vacation.  The logic behind this is simple.  Stocks are quite capable of losing 30% of their value or even much more in a rather short period of time.  When these periods of volatility occur, the odds are that you will not escape the carnage.  Based on historical data, it often takes 2-4 years and sometimes longer to recover from a major market setback.  When your goal is short-term, it is more important to protect your resources than to reach for higher returns.

 

  1. Lack of Diversification

Diversification is the key to managing total portfolio risk and volatility.  Reallocating funds moderately between asset classes that have a low correlation relative to the U.S. stock market can potentially reduce portfolio volatility without significantly sacrificing long-term portfolio returns.

 

  1. Concentration – Keeping Most of Your Eggs In One Basket

A concentrated investment strategy is the quickest way to accumulate wealth as long as you make the correct investment decision.  It is also the quickest way to lose wealth if you make a poor investment choice.  A general guideline is to limit any individual stock to 5% or less of the stock portion of your total portfolio.  An allocation above 5%, while carrying significant risk, could be justified if you are knowledgeable about the specific investment and are confident that this particular investment can outperform the broad market or other alternatives.

 

  1. Stretching For High-Yield At The Expense Of Quality and Stability

Income-oriented investors are frequently attracted to the promise of high-yielding investments.  It is important to mention that investment returns are comprised of two factors.  One factor is the income or yield that is generated in the form of interest or dividends.  The second factor is capital appreciation or depreciation (loss).  Total return, the sum of these two factors, is the bottom-line and all that counts.  If an investment advertises a yield that seems too good to be true, it probably is.  Interest rate or yield is irrelevant if you lose your investment.

 

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Christopher Parr is a River Hill resident and President of Parr Financial Solutions Inc.- an independent, fee-only financial advisory firm:  www.ParrFinancialSolutions.com

River Hill Magazine: Does Your Portfolio Look Like a Shoebox? Part II: Getting Organized

Investment Portfolio Shoebox

Click Shoebox image to access Part I

The first article in this series (February, 2015) defined the concept of a shoebox portfolio, identified the various effortless ways that a shoebox portfolio can be cultivated, and pointed out the pitfalls and consequences of neglecting a thorough portfolio review on a periodic basis.

This article focuses on how to address the problems of a shoebox portfolio by undertaking a comprehensive portfolio review and taking action to streamline the shoebox.

Step 1: The first step in this review process is to organize the items in your shoebox by making a list of every distinct financial account that is owned by the members of your household.  A simple table can be created listing the name of the account holder, the type of account, the brokerage company that serves as custodian for the account, and the current value of the account.  It is best to use the same reporting date for all accounts such as the end of a month, quarter, or year.

Account types refer to all of the various account forms mentioned in last month’s article – individual, joint, IRA, Roth IRA, 401(k), Pension, Tax-Deferred Annuities, custodial accounts for minors, etc.  A spreadsheet program such as Microsoft Excel is ideal for this exercise because it can eventually be useful when calculating totals, percentages, and “slicing and dicing” the various components and groupings of the portfolio.

Step 2: Once the list of accounts has been compiled, the next step is to designate these various accounts by the account owner.

Step 3: The third step is to separate this list of accounts by owner into the two major categories of tax-deferred accounts and taxable accounts.  This step will become important later as specific investment decisions are reviewed or made to optimize the total household portfolio for tax-efficiency.

Step 4: Now it is time to add the itemized list of the specific investments currently held in each account to your spreadsheet.  The sum of the individual investments in each account should provide a total that agrees or reconciles with the total value of the account.  It should be noted that some investments are treated more favorably than others by the tax code and may be able to be strategically re-positioned by account type to optimize tax-efficiency.

Step 5: Subtotal the value of all taxable accounts in a given household portfolio, and then subtotal the value of the tax-deferred accounts.  The sum of the taxable account subtotal and the tax-deferred account subtotal should equate to the grand total value of the portfolio at the household level.  To cross-check, add up the total account value of each individual account from your account statements. This amount should reconcile to the grand total of your portfolio.

Thus far, all we have done is build an organized, reconciled current snapshot of the shoebox portfolio.  Step 6: Review the spreadsheet focusing at the account level to determine if there are opportunities to streamline and simplify your financial situation by consolidating similar account types.  For example, multiple, dormant (no new deposits being made), company retirement plans from old employers may be able to be rolled into a single self-directed IRA account to minimize annual fees, improve investment choices, and simplify record keeping.

With the number of the accounts in the portfolio streamlined, and sorted by taxable and tax-deferred status by account holder, it is finally time to analyze the portfolio and develop an effective investment strategy.  This will be the topic for a future article.

Christopher P. Parr, CFP®, is a River Hill resident and president of Parr Financial Solutions, Inc., a Columbia-based, independent, fee-only, wealth management firm.  He can be reached at 410-740-9011 or online: www.ParrFinancialSolutions.com.

This article was written for the April 2015 issue of River Hill Magazine.

 

River Hill Magazine: Does Your Portfolio Look Like a Shoebox?

The title of this article is an investment take on the concept of clients presenting accountants with shoeboxes full of miscellaneous “stuff” at tax time. The accountants are then given the mandate to “make order out of chaos” by sifting through the rubble and miraculously pulling the necessary tax information together in a cohesive manner.

In the world of personal investing, it is quite common to find that a similar situation exists. The tax code is perhaps at least as much to blame for this inefficient fragmentation. It seems that every time a new idea is introduced to encourage saving for long-term goals, the easiest political solution is to create a new, unique tax-favored account to support the specific idea.


As a result, it is not uncommon to find many of the following type of accounts within a single household:

  1. Joint taxable account or separate individual taxable accounts
  2. Individual retirement accounts (IRA’s)
  3. Individual Roth IRA accountsPortfolio Shoebox
  4. Active employer-sponsored retirement plans (perhaps multiple) for each working adult
  5. Dormant (no new deposits being made) employer-sponsored retirement plans from “old” jobs
  6. Inherited accounts requiring minimum annual distributions that cannot be commingled
  7. Individual non-qualified tax-deferred annuities

If there are children in the household, perhaps there could be additional custodial accounts and Section 529 College Savings Plans for each child. In other words, your family may have quite a number of distinct accounts that cannot be commingled for various tax or legal reasons.

Up to this point, we have only considered the number of different accounts that find their way into the shoebox. When you consider that each account must be invested and the available investment choices made on an account-by-account basis, the shoebox really starts to get cluttered.

Most people have a tendency to make investment decisions in an ad hoc manner. Ad hoc means that investment decisions are made individually as cash becomes available to invest or as assets are acquired. The shoebox portfolio is a collection of multiple types of investments and accounts that accumulate gradually over time. Many of the individual investment holdings may even be different versions of essentially the same thing! This is particularly common if the investor attempts to create a balanced portfolio within each account.

A few more ways to accumulate miscellaneous investments in your shoebox are:

  1. Acting on “hot” tips from friends, relatives, co-workers, or brokers
  2. Refusing to sell any holdings that might lead to tax consequences
  3. The “Aunt Nelly” syndrome – these stock certificates were inherited from Aunt Nelly’s estate.

Aunt Nelly would be heartbroken if we ever got rid of them. (Aunt Nelly is dead!!!)

Five serious problems facing investors suffering from a shoebox portfolio are:

  1. Ongoing record-keeping challenges
  2. A potential tax-reporting nightmare (or at least a tax-inefficient portfolio)
  3. Lack of a clear investment strategy focusing on attainment of financial goals
  4. Inability to assess the risk, the cost, or the investment return of the total portfolio
  5. A mess for family members to “figure out and clean-up” in a sudden contingent situation.

The purpose of this article is to define the shoebox portfolio concept, identify the various, seemingly effortless ways that a shoebox portfolio can cultivate for many of us, and point out pitfalls and consequences of maintaining the status quo. A future article will focus on how to address this issue.

Christopher P. Parr, CFP®, is a River Hill resident and president of Parr Financial Solutions, Inc., a Columbia-based, independent, fee-only, wealth management firm. He can be reached at 410-740-9011 or online: www.ParrFinancialSolutions.com.

This article was written for the February issue of River Hill Magazine.

Financial Planning Magazine – Safer Strategies for Leveraged Investing

Christopher P. Parr comments on leveraged investing in Financial Planning Magazine :  “My advice to clients over my 20-plus years has always been to never buy on margin,” says Chris Parr,  who heads Parr Financial Solutions, a wealth management firm in Columbia, Md. “You should not invest what you don’t have.” Several planners agreed that margin loans have a place – but that place isn’t in the stock market.

Read full article here.

 

Baltimore Sun – Wall Street Shrugs Off Sequester

Christopher P. Parr, when interviewed by Baltimore Sun columnist Eileen Ambrose on whether Wall Street ignoring political drama in Washington is the new norm, said “Wall Street has gotten ahead of the game.”

“Sure, there are positive signs, Parr said, but the economy’s annual growth rate will be cut by at least half a percentage point once the sequester cuts are in force. That’s significant, given the current modest growth rate,” he said.

“I’m more worried about: Is this the time to dump fresh money into the market?”