How to tell if your investments are underperforming
THE STACK #30The other day, on my weekly Q&A on Instagram, a follower asked a question that got me upset.
Their question was, “ My husband’s financial advisor has him invested in Cash and Equivalents; what does this mean?”.
The financial advisor advised them to put all their money in cash. Cash is the worst-performing asset class that doesn't offer much return on investment.
Even if they were planning to retire soon, they should still have some equity and fixed income allocated in their portfolio because they will need to live on their retirement funds for another 15-30 years. Having only cash in their portfolio will not be sufficient to cover their expenses, and they will run out of money quickly.
The financial advisor essentially put their money in a glorified savings account. They could have bought a GIC and still performed better. This makes me wonder: What’s the point of hiring a financial advisor if they will do a worse job than you? Now you get why this made me livid.
In today’s Stack, I’ll teach you how to perform a self-audit on your investment portfolio.
THE STACK
Determine how much risk you should take on
Many people's investment portfolios often fail to perform well because they incorrectly assume that they cannot take any risks. In the intake questionnaire, when they answer the financial or robo advisor's questions, they tend to choose low-risk options. As a result, the advisor automatically puts them in a low-risk portfolio based on their response, which is why their portfolio's performance may be underwhelming.
This model is flawed because novice investors often misunderstand the implications of low-risk investments. Fear of risk typically stems from a lack of investing knowledge.
Your investing risk tolerance should be based on your goals and investment horizon.
Short-term goals of 0-5 years should have very low-risk, conservative investments.
Mid-term goals of 6-10 years should have low-risk, moderately conservative investments.
Mid-term goals of 11-15 years should have moderate risk investments.
Long-term goals of 16-20 years should have high-risk, moderately aggressive investments.
Long-term goals of 21+ years should have very high-risk, aggressive investments.
Compare your performance to a benchmark
Each portfolio allocation has an expected average annual return. It's important to compare your portfolio to this benchmark annually.
Here’s an example of the benchmark returns for different asset allocations:
Using the appropriate asset allocation that matches your investment horizon is the most crucial step when investing because it will determine the future value of your investments. If you underestimate your risk tolerance and choose a conservative portfolio instead of an aggressive one, you will have significantly less money and might not be able to retire comfortably.
If you have 21+ years until retirement, you should be in an aggressive portfolio which returns 12.30% every year. If your portfolio performs less than this, it’s time for an overhaul.
THE TOOL
Most financial and robo-advisors use the questionnaire model to determine your risk tolerance, which is outdated and ineffective. This is why I created my proprietary tool, The Risk Score Matrix™, which focuses on numbers instead of feelings. It calculates your risk based on your age, investment horizon, portfolio size, goal urgency and risk comfort level. It is available in my Investing Course - The Stack My Dime Blueprint.
You will get a step-by-step breakdown of how to calculate your risk tolerance accurately and the type of asset allocation and investments to choose based on your risk tolerance.
I am so blessed to have built a community where people feel comfortable asking these questions and getting unbiased guidance, and I want this to become the norm.
I understand how isolating and overwhelming the investing world can be, which is why I created a safe space where women like you can ask questions without judgment.
A circle where 100s of women can learn from each other, hold each other accountable and are motivated by a shared goal of investing $10,000,000 in 2024. This is more than a challenge; it’s a movement! When you join the challenge, you’ll also get a 60% discount to The Stack My Dime Blueprint.
THE ACCOUNTABILITY
You should have received a year-end statement from your financial institution or robo-advisor.
Review your portfolio return for last year to see if it met the benchmark based on your investment horizon.
If it underperformed, it’s time to switch up your portfolio.
THE COURAGE
THE KNOWLEDGE
Equity
An equity asset is a type of asset in which its owners get part ownership of the company.
Equity assets are usually traded on a stock exchange.
Equity assets are considered a high-risk, high-reward asset class and are used for capital growth.
Examples of Equity assets include Common stocks, Preferred Stocks, Exchange Traded Funds (ETFs) and Index Funds that contain stocks.
Fixed Income
A fixed-income asset is a type of asset in which its investors earn a guaranteed fixed interest.
Fixed-income assets are typically debt-based investments where the investor gives a loan to
a government, municipality or corporation to get back a fixed interest.
Fixed-income assets are considered a low-risk, low-reward asset class and are used to preserve capital while earning a guaranteed interest.
Examples of Fixed-Income assets include bonds and treasury bills.
Cash and Equivalent
Cash and Equivalent is an asset class that consists of cash and any cash-like asset, such as a Savings account, Money market account, Certificate of Deposit, or Guaranteed Investment Certificate (GIC).
Cash and Equivalent are low-risk, low-reward investments and are used for capital preservation.
That's it for this week's STACK! Talk to you next week,
But until then...Keep Stacking!
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