4 Ways Changing Your Brakes and Managing Your Portfolio are Similar

1.  It takes time.  Changing your brakes might take you a couple hours or all weekend depending on whether or not you know what you’re doing.  Managing your investments takes time too.  You should review your investments once a quarter to make sure your portfolio is still in balance, to check for tax loss opportunities, and to ensure your funds are performing as expected.

2.  It takes expertise.  The majority of people who own cars wouldn’t dare change their own brakes.  They don’t know how to and they don’t care to learn.  The same can be said for your portfolio.  Are you willing to spend the time to educate yourself about the nuances of proper asset allocation? Or learn the intricacies of tax location optimization? What about researching the most cost-effective mutual funds?  It isn’t impossible to learn but it does take knowledge to effectively manage a portfolio.

3.  It takes willingness.  Many people have both the time and the expertise to change their own brakes, they simply don’t want to.  On a less technical scale, I am guilty of this.  I used to change my oil in college.  Once I graduated I stopped changing my own oil and started paying someone else to do it.  I could do it but I don’t want to.  For some, investing is exciting but for most it’s easier for someone else to handle it so they don’t have to.

4.  You risk getting it wrong.  The major reason I don’t change my own brakes, aside from the first three reasons listed, is the fear of doing it wrong.  If I mess up and my brakes fail then I have a serious problem, potentially fatal.  If, when managing your own portfolio you make a mistake, you may not even know it.  A great example would be selling stocks in a panic when the market is down.  Those that sold out at the bottom of the 2008 crash missed out on an enormous 5 year stock market rally.  This could potentially ruin the financial plan for someone close to retirement.

There are some people who have the time, expertise, and willingness to manage their own portfolios.  For others, one or more of the previously mentioned reasons is enough to consider hiring a fee-only, objective financial advisor to help manage their money.

Build Your Portfolio Like You Build Your Fantasy Football Team

This time of year everyone who plays fantasy football is in the midst of
drafting their team. An enormous amount of time and energy will be spent
researching this year’s potential sleepers and busts. If only we spent that
much time building our portfolios.

A basic fantasy football team is made up of a quarterback, two running
backs, two wide receivers, one tight end, one flex player, one defense and
one kicker. Everybody ends up drafting at least the appropriate number of
players to fill each of those slots.

But when the average person invests they end up owning many funds that do
the same thing. I see it all the time; someone will have six US large cap
stock funds and claim they are diversified. This is the fantasy football
equivalent of drafting six quarterbacks when you can only play one.

A properly diversified portfolio will include US large and small cap stocks,
international large and small cap stocks, emerging markets stocks,
commercial real estate (REITs), commodities and various types of fixed
income. These are the building blocks of a solid portfolio.

After you finish this year’s draft consider checking your investments to
make sure your portfolio is as well diversified as your team.