This episode is the sixth part in a series about your post-divorce finances. If you have not already heard the first five parts of this series, be sure to listen to them because they build upon each other.
By now, you should have outlined your financial goals, found out how to choose a financial advisor, and learned some key financial terms and concepts. Even if you are early in the divorce process, planning ahead will help you know what you need to think about during the divorce.
How do you know that your financial advisor is doing a good job? You may not keep the same advisor for the rest of your life, and in some cases, you may want to consider changing advisors. Here are some tell-tale signs that you may want to change sooner rather than later:
1) Your investment performance is worse than the benchmarks.
Monitoring your investment performance is an important part of assessing your investment strategy. For a given year, what return are you receiving on your accounts? Of course, stocks fluctuate from day to day and year to year. To see how your investments are performing, compare them to benchmarks (i.e., groups of other stocks).
For example, the S&P 500 is an index of the top 50 stocks in the US. Perhaps your stocks went up 5% in one year, but the S&P 500 went up 7%. If so, you may want to ask your advisor why. However, perhaps the stock market as a whole went down one year, but you lost more money than the benchmark. If so, that is a problem.
If you see a trend where your portfolio is repeatedly performing worse than the benchmark year after year, you should strongly consider making a change. We recommend that you do your own research to learn what the best benchmarks are to accurately compare your portfolio.
2) Your investment portfolio is overly complicated.
For most people, a few investments are enough. Those investments might be funds, such as an index fund that contains 500 stocks. However, each investment will be a single line item in your portfolio.
Reportedly, Warren Buffet, a great investor, plans for his money to be invested in just two funds after he dies: 10% in short-term government bonds, and 90% in Vanguard’s low-cost S&P 500 index fund. Keep in mind that Buffet is a billionaire, but the point is that it is fine to have a simple portfolio. You should understand every investment in your portfolio. If you have 50 different line items in your portfolio, it probably is not a good sign.
3) You have red-flag investments in your portfolio.
You should probably not have some types of investments in your account if you are listening to this podcast. You are unlikely to need any high-fee investments; they are probably unsuitable for you and your lifestyle. Low-fee investments will help you earn more money over time from your investments.
Below is a list of investments that are not appropriate for most people. If you have these investments, you should reconsider keeping them:
- Structured products
- Hedge funds
- Private equity funds
- Any kind of illiquid fund, which involves locking your money up for 2 years or more
- Any sort of directional strategy
- Anything that cannot be explained in a few sentences, or that takes up more than one sheet of paper to explain in-depth
- Anything that has high fees (over 1.5% for any investment fund)
To decide if your financial advisor is doing a good job for you, you should look at the three points above. Of course, they are general recommendations, so please take your own circumstances into account. Remember to seek professional guidance about making the best decision for you.
In the next episode, we will discuss the financial documents that you will need to update after your divorce.
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