Everyone needs an intervention at some point and it’s not always for something big. We all fall into habits that, one day, outlive their usefulness. That tends to be particularly true when it comes to investments. It’s easy to fall into bad habits because at the time you develop those habits, they might not be bad. The right investment strategy and portfolio mix in 1999, 2005 and today are all going to be different. Yet many have their 401(k) plan in the same fund mix as when they started that new job back in 2004.
There are a lot of reasons people lose touch with their personal financial reality. Life is busy, investing seems complicated and it’s easy to get sucked in by that fountain of conventional wisdom I call the financial entertainment industry. It’s okay; it happens and all it really proves is that you’re a human being. Look for these signs in your financial life as a check to see if you’re out of touch with financial reality.
You Don’t Know How Much Your Investments Made Last Year
If you don’t know how much your 401(k) or IRA made last year you may be out of touch with financial reality. If you’re not even bothering to check returns it also probably means you don’t have an investment plan and you’re not charting your progress toward your goals. Many people have the same fund mix in place today as when they first opened their IRA. If you can’t remember the last time you opened a statement, you’re out of touch and it’s going to cost you money.
You Haven’t Rebalanced Your Portfolio…Ever
Rebalancing works because you never know when a particular sector is going to get hot. It’s a very counter-intuitive process for new investors which involves selling off some of your winners and buying more of certain sectors that have not performed as well. Even some people working for financial institutions aren’t clear on how it works. My dad recently had a fund that was up 70% and he felt it was time to rebalance and diversify (no kidding!). He called to sell some shares of that fund and switch them to another sector and the customer concierge at his investment house tried to talk him out of it. Fortunately, dad didn’t listen to him but it is a warning that bad advice can come from unlikely places.
You Watch Financial Cable Channels
When dad watches one of the financial cable channels to see how the market did that day, he mutes the audio. You don’t get sound financial advice from the financial cable channels, you get a steady stream of conventional wisdom that’s being paid for by companies with something to sell you. It’s not journalism as much as financial porn. If you’re getting financial advice from a cable channel, you might be disconnected from reality.
You Still Think a Home Is a Good Investment
There are a lot of good reasons to buy a home but thinking it’s a good investment is not one of them. The idea that an owner-occupied home is a good investment is rooted largely in housing industry propaganda, though there have been a few narrow times in financial history where it was more true than it is today (registration required). The number of people who continue to think that owner-occupied homes are a good investment goes a long way to explaining why most people are destined to remain poor.
I just went through realigning my portfolio for what I see as a period of slower growth. Consequently, I’ve shifted my investments away from growth and tilted my portfolio toward income. That’s the right move for me based on my current age, investment plan and where I see the market in six months to a year. What’s right for you is likely much different and that’s why it’s worth your time to do some reading and understand the basics of managing your own investments. It’s easy to take the first step, just sign up for an account at a website like Mint.com and start reading and hanging out in the forums. You’ll learn a lot and it’s free.