When the economy tightens and the financial markets experience volatility, as they are today, many people point to these circumstances as the reasons their investment plans are failing. But the reality is that volatility is a natural occurrence.
If these market cycles are to be expected, why do many investors still struggle? This is the first article in a two-part series featuring some of the most common reasons investment plans fail and suggestions on how to avoid these pitfalls.
- No clear goals for the portfolio. As with many aspects in life, having a clear goal creates a clear direction and improves the odds of success. "To make money" is rarely a true (or effective) goal of any portfolio. Goals should delve deeper and be more specific. Examples might be to retire maintaining the current lifestyle (or to improve it), to pay for a child's education, or to support parents during their golden years, to name a few.
- Concentrating on return; ignoring risk. Too often, investors concentrate on possible returns without realizing the risk involved. Investors should understand what risk they are taking (and are comfortable taking) prior to making any investment.
- No rebalance/sell discipline. Many investors take the time to research particular investments before making the decision to buy. But few conduct the same due diligence to learn what circumstances would necessitate increasing or decreasing the size of that investment within their overall portfolio.
- Lack of diversification. A portfolio invested primarily in one market sector runs the risk of that sector failing, but also stands to gain from any upside of that sector. A diversified portfolio should include investments across many market segments and sectors to help balance risk and reward.
- Going it alone. Keeping track of all these issues is a big job, and most investors don't have the time or education to do it alone. Competent investment advisors work with clients to determine their personal and financial goals, needs and priorities; understand their time frame for achieving results and discuss their tolerance for financial risk. Above all, an advisor must take seriously his fiduciary responsibility to always place the client's best interest as his highest priority.
Bob Burger is an investment advisor for Perspective Financial Services, LLC, in Phoenix. He is a certified financial planner practitioner and a certified divorce financial analyst. Contact him at (602) 281-4357, Bob@MoneyAZ.com, or visit www.MoneyAZ.com.