Tips to protect your investments

(USA Today) -- Years ago I decided to leave the investment business and return to graduate school.  It seemed a good time to hire an advisor to oversee our portfolios.

But I quickly realized that because of the hefty investment management fee we were paying the advisor and the underlying fees in the funds the advisor chose, we were spending a great amount of money to achieve below-market returns.

I asked for a full accounting of our total fees paid.

Our advisor seemed astonished by my request and exclaimed: “No one has ever asked us for that before!  I will have to create a custom spreadsheet to calculate the fees.”  And, so she did.

The “hidden” fees in the fund investments added an additional 50% to the advisory fee we were paying.

Soon I was managing our assets once more.

Whether you decide to manage your assets or hire an advisor, here are three tips to ensure your portfolio generates the maximum return.

1. High fees are enemy No. 1:

William F. Sharpe published a paper: “The Arithmetic of Investment Expenses” in which he argues that “a person saving for retirement who chooses low-cost investments could have a standard of living through retirement more than 20% higher than that of a comparable investor in high-cost investments.” 

If you are investing in mutual funds and paying an advisor as I was, you will want to know and understand the total fee you are paying. Remember almost every advisor charges you on the value of your assets.

So as your money grows, your advisor’s fee increases and so does the fee you are paying the mutual fund manager. Don’t be shy about asking your advisor to calculate the total fees you are paying. If industry averages apply you could be paying north of 2% annually. 

2. Less is more

When my dermatologist prescribed a daily application of Retin-A, I figured if one application was good for wrinkle reduction, two would be even better. 

After a cortisone shot and a week in hiding, I learned a lesson most investors never grasp: less can be more. When too many investments are owned it is difficult to know exactly where the risk lies. Unintended concentrations or omissions can result, and they can increase risk or lower total return.  

Search your portfolio for redundancies or gaps. You and your advisor should know exactly what you own.  

3. Watch out for excessive trading or no trading

Frequent trading generates taxable consequences and high trading fees. Rarely have I seen it employed successfully.

Conversely, when no transactions occur in a portfolio the market is making the decisions. Quarterly or semi-annual meetings with your advisor will ensure you understand her strategy and she is up to date on your objectives. 

Fees must be reasonable, diversification prudent but not excessive, and turnover should reflect your risk tolerance and objectives.   

It’s your money and your future. Own it.   


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