Unusual or “out-of-whack” investment returns should always raise red flags. Two scenarios, in particular, should be clues that you might want another financial professional to take a look at your portfolio:

 

You experience losses while the overall stock market is going up. A diversified investment portfolio should move in the same general direction as the market. For example, if the S&P 500 Index increased by 10% during the year, it would be reasonable to expect a stock-based portfolio to go up; the portfolio might go up more or less, but you wouldn’t expect it to lose 10%. There could be a variety of explanations for such divergent returns (none of which are good): 1. the portfolio is poorly diversified and the concentrated areas performed badly; 2. a few individual holdings had very large losses; 3. the investment funds are poorly rated and/or have very high fees; 4. attempts are being made to “time the market”; or 5. the investment account is being churned (investment positions are being bought and sold to generate commissions). While there are plenty of possible explanations, a lagging portfolio during good times is more than enough justification to seek another opinion.

 

Your investments generate consistent gains and never any losses. Before you say, “Boy, that sounds good to me,” be careful what you wish for because you might end up like “Walter.” He asked for a financial check-up about two years before his planned retirement. I was able to give him a second opinion on all but his largest account – worth about $1,000,000. The performance reports indicated that this account had averaged 18% a year and had side-stepped most of the stock market’s drops. Walter was, understandably, very proud of that performance. I was very curious to review the holdings to see how the unusually high and consistent returns were being generated, but he only had partial statements. I was skeptical, and concerned that a great deal of risk was being taken to generate those stratospheric returns. Two months later, Walter came in for a follow-up meeting. A large financial scam had been revealed in the newspaper and Walter was one of the victims. There was no $1,000,000 account. The performance reports had been fabricated. Walter’s retirement plans were destroyed overnight. Now he expects to work as long as he lives. 

 

So, if your statements aren’t quite as good as they should be, or, if they seem a little too good to be true, it might be time to sit down with an experienced financial adviser or planner. Next week we’ll conclude this series with the last set of clues to consider as you PlanStronger™ for your financial future.

 

 

 

 

Have a financial question you'd like answered here? Email: Questions@PlanStronger.com

 

 

 

 

 

 

 

 

 

 

 

 

David D. Holland, a CERTIFIED FINANCIAL PLANNER™ practitioner, hosts a weekday radio show at 9AM on AM1380 Ormond Beach, AM1230 New Smyrna Beach and AM1490 Deland. He has also authored two books in his Confessions of a Financial Planner series. Holland offers investment advice through Holland Advisory Services, Inc., a registered investment adviser in Ormond Beach. He can be contacted at (386) 671-7526. Email your financial questions to info@DavidHolland.com.