While investors often focus on the hottest ETFs, mutual funds and stocks of the year, your focus — being the prudent financial advisor you are — should be to identify misaligned investment portfolios. I refer to this task as a seek-and-destroy mission.
The Portfolio Report Card method I came up with for analyzing and grading portfolios uncovers many of the investment problems that can undermine clients' investment progress. The simple A-F grading system helps investors understand the financial condition of their investments in the five areas that matter: risk, cost, taxes, diversification and performance.
Since mid-2014, a growing network of financial advisors using the Portfolio Report Card method and I have evaluated and graded $31 million in portfolios. Allow me to highlight six common portfolio types that we've encountered and would like to seek and destroy.
1. One-Trick Pony
This is a one stock, one mutual fund or one-asset class portfolio.
Often, this is the kind of portfolio that experiences temporary success, like a lucky stock pick that goes to the moon and emboldens the investor. Typically, this type of portfolio hums along, until one day it's suddenly obliterated by an unexpected scandal, bankruptcy or other unpredictable shock.
2. What's Hot Today
This portfolio contains the most talked about, most widely held and most popular stocks and investments in the present moment.
The two questions that people with this type of portfolio care about or ask is: What's hot right now? Why don't I own it?
3. What Was Hot Yesterday
This portfolio includes the most talked about, most widely held and most popular stocks and investments from previous eras. The only question investors with this portfolio typically ask is: How did my hot stocks and funds turn so cold?
4. The Inherited Portfolio
This portfolio was bequeathed by a family member (parent, grandparent, uncle, aunt, etc.). It often contains totally unproductive stocks or funds, but parting ways with it is a mammoth emotional challenge for the current investor.
Adjusting anything within the portfolio – no matter how small – turns into a crisis of the nerves and unwanted voices like, "I don't want to disappoint mom or dad" with all of these changes. Separation anxiety reigns.
