Stocks have rebounded from the February low and are now turning positive for 2016
. But that doesn’t mean investors are safe from another correction, or a decline of at least 10 percent from last year’s highs.
Martin Pelletier, a portfolio manager at TriVest Wealth Counsel Ltd., has five warning signs for investors who are concerned about protecting their wealth.
“Taking a few proactive steps can go a long way to improving your portfolio’s durability especially when challenging those steep and at times icy markets,” he writes in Canada’s National Post
5 Warning Signs for Investors
1. Too Many Opaque Holdings:
These can include private investments and exempt market funds such as mortgage investment corporations and real estate plays. Many are problematic due to a lack of transparency in the underlying holdings, excessively high management fees and limited liquidity, meaning you cannot get your money out without large penalties. We see no need for such investments in the average investor portfolio.
2. Too Much Deal Flow:
We’ve seen many portfolios comprised entirely of a firm’s deal flow with the transaction history showing nearly every equity deal underwritten being placed in the client’s account. This isn’t surprising as equity financings are very lucrative to the broker or adviser as they get paid a large sales commission to sell the deal, often as much as 5 percent. Remember that there is no such thing as a hot deal for regular investors as capital markets groups will relinquish the commission to retail brokers and advisers only if they are unable to sell it to large institutional money managers.
3. Portfolio Is Too Concentrated:
We once saw an 80 year-old grandmother’s portfolio at a bank-owned brokerage contain a 40 percent weighting to a diamond mine company that went bankrupt with little compensation being provided when she complained to the manager and the ombudsman. A proper portfolio should be well-diversified between bonds and equities according to risk tolerance.
4. Excessive Hidden Fees:
Most investors do not realize the nature of the investment fees they are paying until they try to transfer their portfolio to another adviser. Suddenly they are hit with massive deferred sales charges or excessive trading commissions to liquidate the portfolio.
5. Do You Have an IPS?:
Since a fiduciary duty for retail advisers is likely years away, if at all, we recommend that all investors create their own formal investment policy statement (IPS) that outlines their overall risk tolerance and sets the rules around how their portfolio should be invested. It is an immediate red flag if your adviser has never completed an IPS with you or has not updated it in over a year.
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