investing manisha thakor |
Some financial advisers try to bowl you over with fancy language. Disarm them — and arm yourself for your future — with a few simple questions.
One complaint I hear as a financial adviser is that investment jargon — ETFs, P/E ratios, DRIP plans and other terms loaded with capital letters — bores, confuses and overwhelms people seeking advice.
To stop the buzzing in your head, apply the 80/20 rule, aka the Pareto Principle, which states that in most situations, 20 percent of invested input drives 80 percent of the results. For example, 80 percent of the time you wear 20 percent of your wardrobe, or 80 percent of the meals you cook come from the same 20 percent of your recipe collection.
The principle applies perfectly to investing. Most (maybe even 80 percent) of your long-term financial success stems from your understanding three simple factors: asset allocation, fees and performance.
Ask your adviser:
'What is my asset allocation?'
The mix of stocks, bonds, hard assets and cash you create, your allocation of assets, ranks as perhaps your most important investment decision. Studies suggest that asset allocation drives long-run performance and explains roughly 9/10ths of your returns' variability over time.
My favorite asset allocation rule comes from a Vanguard founder, who ties optimal bond-to-portfolio percentage to your age. At age 40, you commit 40 percent of your portfolio to bonds and 60 percent to stocks, for instance. Allow wiggle room to accommodate personal circumstances and your stomach for portfolio gyrations.
'What are my total fees?'
Even a small increase in portfolio maintenance fees adds up fast. For example, over a 30-year period, assuming 6.5 percent compound annual returns, each additional 1 percent in fees reduces the end value of your portfolio 25 percent. It's hard to keep calm facing that cost.