Choosing The Portfolio You Need vs. Being Sold The Portfolio You Want

Forbes.com, Fall, 2015. This article was written with Jim Cahn, the Chief Investment Officer at Wealth Enhancement Group. It was part of a series of articles developed under an agreement with Forbes to work with a variety of contributors and assist them in delivering actionable investment ideas each week. The site forbes.com is one of the top 500 sites in the world with nearly 10 million subscribers and nearly 100 million page views a month.

With investing, as with most things in life, you don’t always get the portfolio you want, i.e., the “magic portfolio” with low fees that always performs better than the market and never loses value. But you can get the portfolio you need.

With all the different approaches to investing bandied about by the industry, how can you know if you’re being sold the “magic portfolio” that you want, but doesn’t exist, or a portfolio that meets your long-term needs?

Most investors turn to advisors precisely because investing isn’t their area of expertise; therefore, it can be hard to know if a particular portfolio is what you need. To help you understand whether the portfolio being offered is right for you, ask your advisor these four questions.

Is the risk of the portfolio appropriate for my goals? You might want your portfolio to appreciate aggressively, but aren’t a position to take losses. Or you might have enough money that you can afford to take a loss, but you are a conservative investor and want to avoid losing your principal. Figuring out the portfolio you can live with through market ups and downs is probably the most important decision of all.

What is your investment philosophy? Does your advisor believe high-cost active managers add value or low-cost indices offer the best value? Does your advisor utilize a short-term market timing or long-term buy and hold strategy? Does your advisor believe in using non-traditional assets, like commodities and hedge funds, or stick to stocks and bonds?

How did you arrive at your philosophy? Did the advisor use industry and academic research? If that’s the basis for the investment philosophy, will your advisor share which research was used? Did they test their approach in various market conditions?

Is your performance consistent with the philosophical approach? If your advisor uses a value approach, how did the portfolio do during periods when value underperformed (It should not have done well!)? If they time the market, how did they do during multiple periods of market transitions (You need to check more than one!)? If they use non-traditional assets, did these investments provide added return or diversification? If they use active managers, have these managers shown they can add excess returns consistently (and did they buy the manager before their returns picked up!)?

We are often sold want we want. But we know that we don’t always get what we want; rather, the focus should be on getting what we need. A solid investment approach will pursue the return you need with the right level of risk. Asking the right questions up front can minimize the chance of being taken by an investment approach that’s not right for you.

Click here to see the article on Forbes.