Retirement investors have a simple task: Compound their money steadily over decades at minimal risk. Easy, right? You’d be surprised.
Many of us want the kind of sure-footed advice that will lead to a predictable, low-risk outcome, but often we are sold the opposite. Unsuitable, high-risk strategies that work once a decade. High-cost funds with lackluster returns. Fees galore.
Recognizing these risks is half the battle. Here are five danger signs that your investment plan is higher risk than necessary and likely needs to be reconsidered before too much damage is done:
1. Unclear fee structures
Do you know what you pay your advisors? Do you know what fees you pay for the funds they buy on your behalf? What ongoing costs are associated with running your account?
Chances are, you don’t, and that’s the danger. Many advisors charge 1% of your balance each year, then buy you funds that cost you another 1% to 2%. Add it up, and you could be losing 2.5% or more of your money each and every year, regardless of how the market performs.
2. Vague relationships
Brokers get paid to recommend funds to you. Sounds crooked but it’s perfectly legit. And the funds they recommend might be good choices, but they also might be expensive choices. You might never know of a cheaper fund with the same goals, since that fund doesn’t participate in the pay-to-play scheme common on Wall Street.
3. Complex investments
If it sounds too good to be true, it probably is. And if it sounds too complicated to understand, beware. Tricky investment strategies have a way of working for a short time and then imploding without warning.
Your advisor has not figured out some way to game the markets on your behalf and if he or she did trip into something unusually remunerative, it won’t last. In fact, you easily might end up the sucker who got in late and took the ride down.
4. Hard-sell tactics
There is no investment in the world that cannot wait a business day, if not a week or a month. If your advisor calls you up on a Friday after lunch and warns that the train is leaving the station, ask him or her point-blank: What’s your commission on this deal? No clear answer? Hang up and find a new advisor.
5. Improper portfolio design
A 25-year-old shouldn’t be holding loads of bonds. Makes sense, right? Well, by the same token, a 75-year-old with an all-stock portfolio is playing with fire. If your gut tells you that you are running too much risk, chances are high that you are running way, way too much risk.
A solid advisor works for you and only you. He or she watches out for ways to lower your investing costs. And by no means are you ever pressured to make a quick decision with your money. Recognizing these kinds of risks is important to protect your savings from pointless accidents along the way to retirement.