When you cut the clutter in your financial life you optimize your investments and will get better returns.
, I discussed a few ways you can simplify your financial life — namely by reducing the number of investment accounts and investment holdings you have. Here are several more ways to cut the clutter.
1. Too many advisors
After the Bernie Madoff scandal you might be tempted to have more than one financial advisor. However, there are other ways you can reassure yourself that your advisor isn’t committing fraud. Chief among them is to makes sure he isn’t taking physical possession, or custody, of your financial assets.
You may think that having more than one advisor increases diversification — the idea being that maybe one of them will beat the market. Perhaps you will try both out for a year or two and see who performs better. Or you might do some mental accounting and hire one guy for an “aggressive” portfolio allocation and another for a “conservative” allocation.
The academic studies show that your overall asset allocation drives your returns. So if you’ve got two advisors with two different asset allocations, and those allocations are changing constantly, now you’ve lost control of the single most important decision in your overall portfolio.
You also have to account for investments wrapped inside other financial products, like variable annuities and life insurance. If you’ve got these vehicles, then you’ve probably got another advisor — an insurance salesman — who is masking as an investment advisor.
Instead, you should have only one advisor for your investments and one advisor for your insurance. Just make sure the investment guy doesn’t sell you insurance, and the insurance guy doesn’t sell you investments.
2. Too many plans
Physicians make tough patient decisions quickly and definitively, but we’re flip-floppers with our investments. How many times have you second guessed yourself? “Should’ve, would’ve, could’ve” is pervasive.
“I should’ve sold at the beginning of 2008, before the crash.”
“If only I would’ve bought more Apple stock.”
“I could’ve switched funds but didn’t.”
This leads to too many transactions in your accounts and you end up buying high and selling low — exactly the opposite of what you should be doing. This also means you change your asset allocation frequently, which leads to changing your investment plan too frequently. Just like having multiple advisors, you’ve lost control of your portfolio. You think you’re proactive, but in reality you’re reactive. By the time you know something, it’s too late.
When you’ve got too many investment plans, you actually have no plan at all. So choose one allocation. Have a plan. And stick to it.
3. Too many fees
If you’ve got too many accounts, too many investments, too many advisors, too many plans or all of the above, then you’re probably paying way too many fees. I’m all about keeping fees reasonable.
Here are all of the fees you’re paying:
Trading commissions on individual stocks
Bid-ask spreads on individual stocks
Markups on individual bonds
Mutual fund commissions
Capital gains taxes in taxable accounts
Lower performance due to lack of an investment plan
Higher taxes due to a tax inefficient portfolio
Account maintenance fees
The more accounts and investments you’ve got, the more fees you’re paying. Lowering your fees directly results in higher returns.
Investing isn’t necessarily easy, but you can make it more understandable. So cut the clutter and simplify your financial life. You’ll have a better grasp of your finances and just might have a larger portfolio.
Your financial prescription: In financial planning, simpler is usually better.