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5 Ways You May Be Messing Up Your Investments

Tuesday, November 8, 2016 10:26
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Investing is hard enough to do well without shooting yourself in the foot. Here are some common ways people mess up when it comes to managing their holdings of stocks, bonds and cash.

• Holding too much cash. Many Americans are hunkered down in certificates of deposit and other cash holdings, steering clear of the volatility and uncertainty of the stock market. A recent survey by BlackRock suggests that a lot of people have gone overboard.

On average, the more than 1,600 people surveyed said they held 67% of their financial assets in cash, with stocks/equity funds taking up just 16%, bonds 6% and other assets the remainder. Cash represented 61% of portfolio allocations in a similar BlackRock poll in 2013 and has steadily crept higher.

The problem is that cash holdings, at today’s meager yields, offer virtually no possibility for long-term gains and might not even keep pace with inflation.

“Cash has no potential to grow over time. In fact, the investor who goes to cash on the belief that he or she is reducing the risk of portfolio loss is mistaken,” said Calamos Investments in a recent report. “The longer cash is held in a portfolio, the more it loses value.”

Many people are hanging onto cash out of concern about other alternatives, especially those tied to the stock market. But are those other alternatives all that bad for people with a long-term outlook?

Yes, short-term stock-market results can fluctuate all over the board, but long-term returns are almost always positive. Assuming you held a portfolio of Standard & Poors’ 500-index stocks, you would have made money 86% of the time over every rolling five-year period since the 1920s, according to research by Ibbotson/Morningstar that includes reinvested dividends. Over 10-year stretches, stocks generated positive results 95% of the time, and they’ve never lost money over any stretch of 20 years. If you’re investing for the long term — meaning three to five years or more — stocks are a reasonable investment option. Cash generally isn’t.

• Not minding fees and taxes. Investment expenses and taxes can exert a drag on your performance, so it pays to minimize them. If you use mutual funds, for example, make sure your expense ratios are reasonable. Expenses have been gradually dropping to the point where stock funds now charge 0.68% on average (equal to $6.80 for every $1,000 invested), according to the Investment Company Institute. Bonds are cheaper — 0.54% on average. Those are good figures for comparisons.

As for taxes, try to avoid a lot of selling that could trigger gains on which taxes would apply. At a minimum, consider delaying sales until after December, so you can defer the tax bill for another year. The reverse generally holds true if you’re sitting on paper losses — if you sell before year’s end, you can lock in capital losses for immediate use. As a general rule, up to $3,000 in net losses can be deducted against ordinary income each year. These tips apply if you’re investing in taxable accounts. They don’t apply if you’re using 401(k) plans, Individual Retirement Accounts or other sheltered accounts.

• Being too complacent over bonds. Bonds and bond funds are integral parts of a diversified, balanced investment approach. Bonds provide stability to help offset occasionally sharp losses on stocks, rarely falling as much or as often.

However, too much in bonds could be a bad thing, especially now. Bonds and bond funds aren’t risk-free. Like stocks, they occasionally fall in price. And with yields so low now, there isn’t much cushion. In October, for example, most bond categories slipped in value. Bond funds holding long-maturity government securities were down 3.5% on average for the month, including interest, according to Morningstar.

Yet investors don’t seem disturbed about the possibility for significant bond losses. The public has added more money than they have pulled from bond mutual funds every month this year, reports the Investment Company Institute. At the same time, investors have steadily withdrawn from stock funds.

Could the October stumble presage a bond-market rout? Not necessarily. If economic growth remains sluggish and inflation mild, bonds and bond funds likely will hang in there. But more losses are possible. Historically, long-maturity bonds have lost ground every four or five years on average.

• Having too little globally. The performance of foreign stock markets hasn’t been remarkable in recent years, which helps to explain why many Americans haven’t shifted much of their portfolios overseas.

But Americans aren’t alone. A recent Vanguard study found that investors in each of the five nations studied had a bias favoring companies headquartered in their home countries. Americans, for example, had about 79% of their stock holdings in U.S. corporations, even though U.S. companies represent only about 51% of the world’s total market value. Canadians and Australians had even more pronounced home-market biases, while the British and Japanese had less.

Vanguard cited several reasons for home-market bias, including a greater preference for…

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The post 5 Ways You May Be Messing Up Your Investments appeared first on Liberty Investor™.

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