Today is a big day, my first blog post for Lighthouse Capital, LLC (I think the lawyers make us include the LLC). When the Managing Director of Lighthouse, Brian Foley, approached me regarding blog posts I thought to myself, “but I’m a financial advisor, not a writer?” Well, I have never turned down a chance to embarrass myself publicly, so here it goes.
To get my feet wet, I thought it would be best to outline the most common issues I encounter when reviewing a prospective client’s investments. These are issues I focus on the most in my practice and I challenge myself daily to best educate my clients on these topics.
- Misconception of risk. I find many people not knowing how much risk they are exposed to within their investments, which can be a major factor in not accomplishing financial goals. Too much risk can lead to significant loss of value in a short amount of time. And too little risk may result in not achieving the rate of return you need to accomplish your long term goals. When determining the appropriate amount of risk for one of my client’s I go through a fact intensive exercise to determine their goals, needs, time horizon, and overall risk tolerance. In other words, each individual and family has their own set of circumstances and the amount of risk one takes with their investments should not be generalized.
- Understanding fees. How much are you paying? Is it a management fee? Transaction fees? Underlying fees or administrative fees? All of the above? I believe it’s important to have a clear understanding of all costs up front. This is why we do a cost analysis right on our account application and send out quarterly fee notices to all our clients. Transparency is key when it comes to cost. Additionally, I strive to provide my client’s with the best value, as the lowest cost investment does not necessarily equate to the best investment.
- Over-concentration in one particular stock, fund, or asset class. Diversification is one of the key pillars to sound long-term investing, and is lacking in many prospective portfolio’s I encounter. At times, diversification can result in investment performance being out of sync with one particular index and/or asset class (i.e. S&P 500, large cap growth category, etc.). But don’t be alarmed if your diversified portfolio underperforms the top performing asset class, as this is exactly what a well diversified portfolio is designed to do. Diversification is designed to mitigate unforeseen risk, and in-turn increase the likelihood of achieving your long term goals.
I look forward to regularly sharing my views relating to personal finance. I would appreciate any feedback that you may have, and if you have a topic that you would like me to cover, please email me at firstname.lastname@example.org or find me on Facebook at Paul Hundley, Lighthouse Capital.
Make it a healthy, happy, and profitable day!