A Understanding your portfolio

n investment in knowledge pays the best interest. –Benjamin Franklin

Over the past few weeks I have opened up a bunch of new accounts. Most of them have been the result of a “we don’t want your business because you have an Israeli address” letter sent out by Morgan Stanley. Investors have been asked to move their accounts away from this and other firms and they have come to me to help them out. When I sit with a prospective client I ask a lot of questions so that their financial profile is clear in my mind, and then we can start speaking about short- and long-term goals and needs.

As part of the process I have the client fill out a financial questionnaire. Each answer is given points and at the end of the form I tally up the results. In multiple cases, based on answers given, multiple clients came out with portfolios that should be geared toward growth. They were shocked and said that in reality they are very conservative investors. Each one said that I should look at their account statement and I will see just how conservative they actually are. I then proceeded to go through their investments line by line with them and they saw that they actually had very aggressive, stock-only portfolios.

Survey after survey reveals that most investors have no clue what they are investing in, how much risk they want to take, and what they are paying in fees. In addition, investors typically have no idea how aggressively or conservatively their money was being invested. As I just demonstrated, as an investment adviser that sits with prospective clients regularly, I can attest to this lack of knowledge.

Reality

I can’t tell you how often I sit with prospective clients who think they really understand what they own and how conservative their investments are. But on reviewing their statements, just like the above case, we often find a vast difference between what they think they have and the facts on the ground. For example, someone may say she is “a risk-free investor with a conservative portfolio,” and then we find that her portfolio is solely invested in stocks, and during the course of the year this portfolio has moved up and down by over 20%.

Blame game

I think both financial advisers and clients share the blame. Financial advisers have an obligation to explain investments to their clients and need to take the time necessary so that the client understands what they are investing in. On the other hand ultimate responsibility lies with the client. It is always worthwhile taking the time to understand where your money is being invested, and you should always ask questions until you are totally clear about what you are investing in.

Take it seriously

While it’s imperative that you understand what you are investing in, before you even start investing it’s a good idea to map out your monetary goals. The investments should be a function of what your goals are. Do you have children or grandchildren to marry off? Are your elderly parents in need of care? Are you planning retirement? You must determine your own budget needs first, and then you can figure out what investments are needed to enable you to achieve those goals

Get your hands around your investment

When it comes to making investment decisions, don’t be blinded by the hopes of a high return. Rather, focus on the whole range of the investment’s characteristics. It is necessary to understand the cost, degree and nature of the risks, investment goals, performance history and any special fees associated with an investment before you decide to purchase it. Never assume that an investment is governmentally insured, low risk, or guaranteed to deliver a certain return. Find out all the necessary information – and then make sure that you understand it properly. Then you can check it against your own goals and risk profile to see if the recommended type of investment is a good fit.

Remember: ignorance isn’t bliss. Know what investments you have and why you have them.

The information contained in this article reflects the opinion of the author and not necessarily the opinion of Portfolio Resources Group, Inc., or its affiliates.

Aaron Katsman is a licensed financial professional in Israel and the United States who helps people with US investment accounts. He is the author of the book Retirement GPS: How to Navigate Your Way to A Secure Financial Future with Global Investing.