Hundley: Investment Risk, Fees, & Diversification

 In Personal Finance

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. 

  1. 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.
  2. 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.
  3. 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 phundley@lighthousecapllc.com or find me on Facebook at Paul Hundley, Lighthouse Capital.

Make it a healthy, happy, and profitable day! 

Paul Hundley
Paul Hundley is a Senior Financial Adviser with Lighthouse Capital, LLC. Hundley has been working in financial services since the late 90's and focuses his practice on the investment needs of individuals and families.
Showing 2 comments
  • Sharon R Wade

    Great blog post. Can you define and describe the differences between a 401k and a Roth IRA plan and which is the best plan for folks that plan on retiring in the next 5 years. What is the minimum amount a retiree should have to invest properly??

    • Brian Foley

      Hi Sharon –

      Great questions. An individual who has a 401k available through their employer often times can contribute to either a “roth 401k” or “traditional 401k.” And same is true about an IRA – you can contribute to a “roth IRA” or a “traditional IRA.” The difference between a “roth 401k/IRA” and a “traditional 401k/IRA” is the taxation of your contributions. On a roth basis you are contributing on an after-tax basis and when you withdraw the monies it is a tax free withdrawal. When you contribute on a “traditional basis” then you receive a tax deduction on the amount you contribute, and when you withdraw the monies it is taxed as income. In other words, on a roth basis, the government takes their taxes up-front, and on a traditional basis the government gives you a tax break up-front and taxes you on the back end when you withdraw the monies.

      As for what is best for you, and how much you need to retire, it is impossible for us, or any other advisor for that matter, to answer these questions without knowing more information about your particular situation, as it varies from person to person based upon their needs and goals. I will have Paul Hundley reach out to you via email to discuss this with you.

      Hope you have a great day!

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