4 Actions Every Investor Must Take

Winding Road

The decisions you make as an investor- even small decisions- have a huge financial impact on your life. You work hard to save, you invest, you put a plan in place. However: that’s not enough.

In my 30-years kicking around accounting and finance, I see several actions that investors should take- but don’t. Now, these are not necessarily big, time-consuming actions. Instead these are smaller steps that you need to take. If you do, you’ll keep your financial plan on track.

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Learning to monitor your investments

I’m a big fan of Tara Gentile. I read and listen to just about everything she provides her audience. Tara made a great point in a recent webinar about teaching. To learn something, we have to try and do it before we’re ready. We have to push ourselves to think through that new experience- and that can be uncomfortable.

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So, apply this to your finances. The steps I’m suggesting may be new to you. Because the experience is new, there will a learning curve. But they call it a learning curve, precisely because you’re learning.

Hey, we’re all in the same boat. I’m in the middle of learning about some new recording software for a video client. It’s new, learning it takes effort- and that creates some anxiety.

But we all have to do it.

#1: Read your investment statement

It’s as old as the hills: people do not want to review their brokerage statements after a sharp market decline, or when bad news comes out on a particular investment. It’s critical, however that you review it.

The only way you’ll understand how the event (broad market decline) impacted your investment (blue chip stock mutual fund) is to read your statement. Now, we’ve come along way when it comes to customer statements. They’re much easier to read today than 10 or 20 years ago.

Say, for example, that the S&P 500 index declines 10% in a quarter, and you’re blue chip stock mutual fund goes down 5%. Well, in a way, that’s good news. Your fund manager outperformed the index.

Let’s expand the example. Say that you own 5 stock-based mutual funds. You now have an opportunity to see how all 5 performed in a down market for the S&P 500. Assume that Golden Bear Stock Fund outperformed the other 5 and was only down the 5%. If you want to be in a fund that has less downside risk in the stock market, maybe more of your assets should be in the Golden Bear Fund.

You would only know this is you consistently review your brokerage statement.

#2- Know your investment’s beta

Market fluctuations can cause anxiety. Volatility can cause an investor to sell their equity holdings to avoid the stress of dealing with anxiety. The best way to manage this anxiety is to understand how and why it occurs.

You should know that beta for your stock or mutual fund. Beta measures an investment’s volatility in comparison with the broad market. So, know what you’re getting into. If you want to take more risk, buy an investment with a higher beta. You can choose lower beta investments to avoid risk.

#3- Be clear about your mutual fund’s investment objective 

Now, this may sound simple at first glance. “It’s a blue chip stock fund- of course I know the objective!” I’d suggest, however, that you dig deeper into the summary prospectus, or the Morningstar report.

Many funds give the fund manager some flexibility. A US blue chip stock fund, for example, may allow the investor to move up to 10% of the fund’s assets into foreign stocks. Well, a fund with 0% in foreign stocks may perform very differently that a stock portfolio with 10% in foreign stocks.

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Take a peek at the details of the investment objective.

#4- Don’t forget about the tax impact

Finally, take a look at the after-tax return on your investments. If you’re investing in a tax-deferred vehicle, like a retirement plan, this is not as big an issue. In that instance, the short-term gains, long-term gains and income (from interest and dividends) may be deferred from tax.

The real impact occurs with a plain old vanilla, taxable account. Say, for example, that you own a fund of new tech company stocks. Since these stocks are new and don’t have a track record of generating earnings, they probably don’t pay dividends.

The mutual fund investor is not going to incur much in the way of taxable dividend income on the tech stock fund. The blue chip stock, investor, on the other hand, will own lots of stocks that pay dividend income. The blue-chip fund creates more ordinary income from taxes.

So, step out of your comfort zone and review these four issues. They can help you monitor your investment portfolio, and give you some peace of mind. As always, consult with a financial advisor and a tax expert.

Does this change your thinking? I’d love to hear from you.

Ken Boyd

Author: Cost Accounting for Dummies, Accounting All-In-One for Dummies, The CPA Exam for Dummies and 1,001 Accounting Questions for Dummies

Co-Founder: accountinged.com

(email) ken@stltest.net

(website and blog) http://www.accountingaccidentally.com/

(you tube channel) kenboydstl

Image:

Dominic Alves, Winding Road (Ditchling Road, Hollinsbury) (CC By 2.0)

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