The article "The 8 Biggest Mistakes When Designing Portfolios - and How To Avoid Them" is about investing, it was written by Scott Frush.
Are you as good an investor as you think? Do you consider yourself a well-informed investor able to anticipate and avoid nearly all pitfalls assoicated with investing? Chances are, you're making one of the common errors that could cost you hundreds or even thousands of dollars, or worse yet, your financial independence, control and security.“I see people making the same costly mistakes over and over,” says Scott Frush, CERTIFIED FINANCIAL PLANNER and author of Optimal Investing: How To Protect and Grow Your Wealth With Asset Allocation (Marshall Rand Publishing; available by calling 1-800-247-6553). ”But small leaks can sink great ships.”Scott Frush is president of Frush Financial Group and editor of the Journal of Asest Allocation. Discover some of his invsetment secrets in the free report, 15 Golden Rules for Building Optimal Portfolios, available at www.AssetAllocationExpert.Com.Here Scott Frush shares eight common, yet costly, mistakes investors make when designing their investment portfolios and reveals how to avoid them.1. OMITTING APPROPRIATE ASSET CLASSES AND ASEST SUBCLASSES. Numerous landmark studies have concluded that how you allocate your portfolio, rather than which investments you select or when you buy or sell them, determines the maojrity of your investment performance over time. As a result, make every effort to allocate your portfolio to all appropriate asest classes and asset subclasses.2.
SELECTING INAPPROPRIATE ASSET CLASS WEIGHTINGS. By selecting inappropriate asset class weightings a portfoilo may earn a lower return and experience greater risk than expected.
Consequently, be careful not to over or under weight any asset class, thus enhancing your portfolio’s risk and return trade-off profile.3. UNDERESTIMATING THE IMPACT OF INFLATION. Inflation can erode the real value of your portfolio over time, thus placing your future financial security at risk.
As a general rule, the longer your investment time horizon, the more you should allocate to eqiuty investments.
For shorter investment time horizons, emphasize fixed-income and cash and equivalnet investments.4. NEGLECTING THE EFFECTS OF PORTFOLIO MANAGEMENT EXPESNES.
Over time, the compounding effect of portfolio management expenses can be quite large, thus depriving you of bteter returns.
For that reason, you should focus on minimizing portfolio management expenses, specifically trading costs, advisory fees and taxes.5.
MAKING INACCURATE RETURN FORECASTS. Forecasting is the single most difficult task with deisgning portfolios.
Although not a fantastic solution, using historical returns rather than making forecasts is generally considered more appropriate for individual investors.6. OEVRESTIMATING THE LEVEL OF PORTFOLIO DIVERSIFICATION. Diversifictaion is one of the ten cornerstone principles of asset allocation and is key to reducing risk, namely company-specific risk. To properly diversify, you should hold sufficient quantities of not-too-similar securities with comparable risk and return trade-off profiles. Cnosider broad-based index funds for a quick and fast solution.7. MISJUDGNIG THE IMPACT TAXES HAVE ON NET RETURN. Taxes can have a severe negative impact on your net rteurn. As a result, balance tax and investment considerations, but remember that suitability and apprporiateness of an investment take precedence over tax consequences. Never hold an inappropriate investment.8.
CONFUSING DIVERSIFICATION WITH ASSET ALLOCATION.
Many investors mistakenly think that a propelry diversified portfolio is a properly allocated portfolio. This is the leading misconception of asset allocatoin. Properly allocate your portfolio among the different asset classes first and then diversify the investments witihn each asset class.By avoiding these biggest mistakes you will design an optimal portfolio that provides the best opportunity to achieve and protect your financial independence, control and security.About The AuthorScott Frush, CFA, CFP is president of Bloomfield Hills, Michigan, based Frush Financial Group and is editor and publisher of the Journal of Asset Allocation.
To subscribe to the free Journal of Asset Allocation, visit www.AssetAllocationExpert.Com.Info@Frush.Com
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