Continue to Make Costly Mistakes
2005 - Investors without long-term financial plans continue
to make five common costly errors, according to members of
the Zero Alpha Group (www.zeroalphagroup.com),
a nationwide network of independent, fee-only investment advisory
Giving short shrift to U.S. small-cap stocks and growth
opportunities by chasing returns in exotic foreign destinations.
Because international investments have been “hot”
for the last three years, they are now dangerously overloaded
in the portfolios of many investors.
Rushing into real estate, often on a local and undiversified
basis, in the same way that investors stampeded into tech
stocks in the 1990s. It won’t take much of a correction
in real estate prices to put investors that are overconcentrated
there into a painful bind. Investors that allow real estate
to throw their diversification off balance are setting
themselves up for a fall.
Treating “hot” investment alternatives, such
as hedge funds or private equity accounts, as though they
are asset classes. Though this is a perennial problem
for investors without a financial plan that latch on to
whatever is being talked up in the media and among colleagues,
hedge funds and private equity accounts are in many ways
even more volatile and less liquid than the hot products
of previous years.
Taking a counterproductive, short-term view of tax avoidance.
For example, many investors buy annuities in order to
defer taxes. Such an approach, however, also converts
any gains, which would ordinarily be taxed at the 15%
long-term capital gains rate, and makes them taxable at
the ordinary income rate, as much as 35%. Many investors
bought annuities when they were in their accumulation
years, and at retirement they find out they are facing
the same tax obligation. The drawbacks in this situation
are as follows: 1) They are still in the highest tax bracket;
2) They may increase the tax owed on their Social Security
income; 3) If they don’t touch the annuity, they
disinherit themselves; and 4) Their children will end
up paying the taxes after their death.
Ignoring the gradually increasing costs of owning an investment.
Consider the costs of owning a stock fund inside an annuity,
which adds an additional 1.75% to the cost of the fund.
The average cost of a mutual fund today is 1.3%. Before
the investor makes a return on this investment, the annuity
has to clear these significant hurdles.
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