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To Jump Or Not To Jump?

When I was much younger, I was never hesitant to try risky endeavors.  At that age, many young people feel indestructible.  I certainly felt that way.  Jumping out of a plane from 10,000 feet seemed like a perfectly logical thing to do.  Too be honest, it was so much fun, I’d still be willing to do it again today.  However, there are other risks I wouldn’t undertake again.  Number one on that list would be bungee jumping.

A group of us went to the Sonoma County Fair, many years ago.  After roaming around the grounds for a bit, we spotted a large crane lifting willing participants up into the air.  Once they got to the top, a worker would toss a portion of the rope over the side and then the jumper would leap on the count of three.  Of course, we had to try it.  So, the four males in our group put our money down and queued up.  After the first of our group jumped, he immediately told us not to hesitate when the worker said to jump, or you may take forever. 

I listened to the advice and fell forward head first plummeting to the ground below.  It was a heart stopping leap, but the worst part were the bounces as the bungee sprung back repeatedly.  It was not an enjoyable experience. 

The last guy in our group was a newlywed.  He got to the top of the crane.  Looked over the side and asked himself why he was doing it.  He decided he had a responsibility to his wife.  He forced the operator to take him back to the ground without jumping.  For him, the risk was not worth it. He was the smartest guy in our group.

When it comes to portfolio creation, the are a number of factors to consider, risk being one of the most important.  I list 5 of the most important below:

1)      Taking too much risk or too little: When a client opens an account with me, they are presented with 10 questions.  Their answers to these questions are scored and one of 12 balanced portfolios I created is assigned.  In discussions with the client, I may adjust the assigned portfolio to take on more risk or less depending on the situation.  Unfortunately, many people have either never done this or haven’t done it recently.  This can result in a portfolio completely unsuitable for the investor’s goals.  You may be taking too little or too much risk without even realizing it.

2)      Buying into only one market or one index:  Investors are consistently bombarded with news touting specific indices, like the S&P 500 Index.  While, it’s a legitimate means of building wealth, however if it’s the only investment in a portfolio it fails on two counts.  One it only exposes you to large capitalization U.S. companies.  No mid-cap or small-cap exposure and obviously, no international exposure.  Remember, an appropriately balanced portfolio should also provide downside risk through the use of different markets and asset classes.

3)      Failing to consider cheaper alternatives: Lots of investors are still heavily invested in more expensive mutual funds rather than cheaper ETFs.  For example, Vanguard 500 Index fund has an expensive ratio of .14% vs.  SPDR 500 ETF with an expense ratio of .09%.   Investors should review their holdings to see if there are opportunities to reduce expenses.

4)      Sticking to an improper allocation:  A portfolio constructed for you in your thirties is not going to be appropriate for you in your sixties.  Time to retirement is a huge factor to consider.  Life events like marriage and having children can also change the appropriate allocation of your portfolio. A yearly portfolio review is essential.

5)      Never re-balancing:  The other reason a yearly portfolio review is essential is that it can reveal whether the allocation you originally chose is now out of whack as different classes or markets out-perform.  If you don’t have automatic re-balancing, you can easily fall out of balance within a couple of quarters.

If you would like to discuss a portfolio strategy or need financial planning, do not hesitate to contact me.  Please feel free to share with others and make suggestions for future articles: peter.oneill@fiduciamwealth.com

Peter O'Neill