The Biggest Mistakes in Managing a Portfolio

The Biggest Mistakes in Financial Planning Series

by Harvey Jacobson, CHFC, MBA, CLU

Harvey JacobsonNow that we have gone through one of the most serious financial crisis in our country’s history, certain lessons should have been learned by anyone who had money invested in the financial markets prior to October 2007 when the Dow Jones Industrial Average (DJIA) hit a high of 14,093. Exactly one year later, the DJIA dropped 40% to 8,451. It continued its slide until March 2, 2009 when it bottomed-out at 6,627. During this tumultuous period of 15 months, many investors did not know what to do and many others made the wrong decisions.

Let’s look at a typical young investor who is 40 years old. This investor originally decided to be a “growth” investor, meaning that his portfolio should consist of primarily of stocks and real estate, and a small percentage, perhaps 20%, in bonds and cash. Our investor reviews his portfolio on a regular basis, and is invested in all of the various market segments. In stocks he has domestic large cap growth and value, mid cap, small cap, large foreign, emerging markets, real estate, and perhaps certain sectors, such as financial, technology, or energy. In bonds, his portfolio might have short, intermediate, and long term high quality bonds, municipals, foreign bonds, high yield bonds, and maybe some preferred stocks.

In February, 2009 he is having trouble sleeping and by March, 2009 he makes the dreaded call to move his money to cash. When asked, why, he tells you that although his portfolio is down 40% at least he can hold on to the remaining 60%. His fear is that he will lose it all.

When an investor decides to incorporate a particular level of risk, whether that risk is aggressive, moderate or conservative, he must do that without consideration of current market conditions. Too often, an investor wants to be a “growth” investor, but the truth is that he wants to be a growth investor only in good times or when the market rewards him. If the market is a “bear” market, he may withstand slight declines, but when all hell breaks loose, the tendency is to move to cash. This is one of the biggest mistakes that you can make in volatile markets.

Investors who have remained consistent with their risk profiles through volatile markets have seen a substantial recovery in their portfolios since March 2009. Those who are truly behind are those who panicked and are now left with the decision of how to recover their losses. They can, but it is a much slower recovery.

The message is to know who you are as an investor. If you are conservative, stay conservative. Don’t try and be more aggressive in “bull” markets, thinking that you will pull back in troubled times. If you are “aggressive” stay aggressive, knowing that the ride will be more volatile but your patience is more likely to be rewarded in the end. Above all, stay consistent with your risk profile. You can and should modify the portfolio to reflect current market conditions and always keep favorable investments in the portfolio, but avoid the dramatic and wide spread changes from stocks to cash.
If you attempt to time the market, the risk you take may cost you big dollars in the end.

Harvey Jacobson is President and CEO of California Financial Partners, Inc. www.calfp.com

This article published originally April 13, 2010, Los Angeles Daily News.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. Stock investing involves risk including loss of principal. Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.

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