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Are You Making These 5 Common Portfolio Mistakes?

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Summary

In her annual portfolio makeover series, Christine Benz observes that investors tend to get more right than wrong when it comes to their portfolios. She identifies five common mistakes that she often sees when conducting portfolio makeovers: portfolio sprawl, redundant individual stock portfolios, also-ran mutual funds, asset allocations not informed by the plan, and suboptimal asset location. She provides solutions to each of these problems and offers advice for how to make sure portfolios are performaning optimally.

Q&As

What are the most common portfolio mistakes that Christine Benz has observed?
The most common portfolio mistakes that Christine Benz has observed are portfolio sprawl, redundant individual stock portfolios, also-ran mutual funds, asset allocation not informed by the plan, and suboptimal asset location.

What is the issue with portfolio sprawl?
The issue with portfolio sprawl is that there are too many accounts, too many holdings, and too much redundancy.

How can investors address the problem of redundant individual stock portfolios?
Investors can address the problem of redundant individual stock portfolios by cutting them from the portfolio and replacing them with index funds or all-in-one funds.

What is the danger of investors being too hands-off with their investments?
The danger of investors being too hands-off with their investments is that they may end up holding also-ran mutual funds with multiple manager changes, extended runs of poor returns, and huge asset outflows.

What is the Bucket approach to retirement portfolio construction?
The Bucket approach to retirement portfolio construction is organizing the portfolio from very safe (cash) assets for short-term spending needs to bonds for intermediate-term expenditures to volatile equity assets for long-term growth and inflation protection.

AI Comments

👍 This article provides a great overview of the common mistakes investors make with their portfolios and how to fix them. The author provides a lot of practical advice and helpful tips for investors to make the most out of their investments.

👎 This article is quite long and could be broken down into more succinct points. Additionally, some of the advice provided is overly complex and may be difficult for new investors to understand.

AI Discussion

Me: It's about some common mistakes people make when managing their portfolios. It talks about portfolio sprawl, redundant individual stock portfolios, also-ran mutual funds, asset allocations not informed by a plan, and suboptimal asset location.

Friend: Wow, that's a lot of mistakes. What do you think are the implications of this article?

Me: Well, it's important to be aware of these common mistakes and to take steps to avoid them. It's also important to be aware of the potential consequences of making these mistakes so that you can make more informed decisions when managing your portfolio. Finally, it's important to regularly review your portfolio to make sure it meets your goals and objectives.

Action items

Review your portfolio to identify any areas of portfolio sprawl, redundant individual stock portfolios, or also-ran mutual funds.
Consider consolidating accounts and using index funds or all-in-one funds to simplify your portfolio.
Analyze your asset allocation to ensure it is aligned with your financial goals and consider the tax implications of any changes you make to your taxable accounts.

Technical terms

Portfolio: A portfolio is a collection of investments, such as stocks, bonds, mutual funds, and other assets, held by an individual or organization.
Asset Allocation: Asset allocation is the process of dividing an investment portfolio among different asset categories, such as stocks, bonds, and cash. The process is designed to balance risk and reward by adjusting the percentage of each asset in an investment portfolio according to the investor's risk tolerance, goals, and investment time horizon.
Tax-Deferred Retirement Accounts: Tax-deferred retirement accounts are accounts that allow investors to save for retirement on a tax-deferred basis. This means that the money invested in the account is not taxed until it is withdrawn. Examples of tax-deferred retirement accounts include 401(k)s, IRAs, and annuities.
Index Funds: Index funds are mutual funds or exchange-traded funds (ETFs) that track a specific market index, such as the S&P 500 or the Dow Jones Industrial Average. These funds are designed to provide investors with a low-cost, diversified way to invest in the stock market.
Target-Date Funds: Target-date funds are mutual funds or exchange-traded funds (ETFs) that are designed to provide investors with a diversified portfolio that is tailored to their retirement goals. The funds are structured to become more conservative as the target date approaches.
Lifecycle Funds: Lifecycle funds are mutual funds or exchange-traded funds (ETFs) that are designed to provide investors with a diversified portfolio that is tailored to their retirement goals. The funds are structured to become more conservative as the target date approaches.
Sequence Risk: Sequence risk is the risk that an investor will experience a sequence of returns that is unfavorable to their financial goals. This risk is particularly relevant for retirees, who may need to draw down their portfolios during a period of poor returns.
Bucket Approach: The bucket approach is a retirement portfolio strategy that involves dividing a portfolio into different “buckets” based on the investor’s time horizon and risk tolerance. The buckets are typically filled with different types of investments, such as stocks, bonds, and cash, and are designed to provide the investor with a diversified portfolio that is tailored to their retirement goals.