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Why Transparency Matters to Your Portfolio

13 February 2015 in Investing Insights

Studies have shown that over 30 years, the average equity fund investor has only earned 3.69% annually, compared to the S&P 500 earning roughly 11.1% during the same 30 year period, ending 12/31/13. One may speculate that this gap in performance is due to a lack of knowledge and lesser investment selection. Some analysts tend to disagree however, and believe that many investors are driven by fear in the market place, buying stocks at their highs and selling them at their lows.

There are many intelligent investors out there that manage their own portfolio. However, intelligence does not automatically equate to high yields in the stock market. One must also have courage and awareness to make smart moves at ideal times, which may go against the grain of the average investor. And, in order to make those moves, one must have transparency in his/her portfolio.

TAKE A LOOK UNDER THE HOOD

When asked, some people can tell you by memory what funds they are invested in, but may not be aware of the underlying holdings that comprise those funds. Sometimes it’s not so easy to figure out, based on the type of investment. For example, if you own a single name stock, it’s pretty transparent that you own shares in that particular company.

However, if you are invested in a fund of funds, it may be difficult to find out what the underlying holdings are of each fund that the fund of funds is invested in without searching out the fund’s latest quarterly report. The less transparency there is, the more risk you could be exposed to as an investor.

TRACK YOUR INVESTMENT PERFORMANCE

It is important to regularly monitor the performance of investments. Analyzing the history of your returns and market fluctuations can offer clues into what may be coming in the future. Having greater awareness can help you make better investment decisions.

Cross compare your returns to the investment performance of related securities, benchmarks, other asset classes, etc. Even if you have a loss, it is better knowing than hiding from truth, so you have the option to make adjustments and be more aware of your overall financial situation and outlook.

BE AWARE OF LIMITATIONS AND LIQUIDITY

Do you know if your investments have limitations such as liquidity restrictions? For example, accredited investors may only be able to redeem their shares from certain hedge funds once a year due to lock up periods.

Liquidity can vary a lot based on the type of investment, how actively it is being traded, market fluctuations, demand, and subscription/redemption restrictions. Due to these types of regulations, one should fully understand any limitations involved before investing.

UNDERSTAND THE FEE STUCTURE

Before making any investment decision, in addition to reviewing historical performance and projections, it is beneficial to perform due diligence on the ongoing fee structure of an investment, if applicable.

Some ongoing fees you may encounter, depending on your type of investment, are annual operating expenses such as management or distribution fees, investment advisory fees, and 401k administration expenses. ETFs typically charge annual fund operating expenses based on their expense ratio.

Fortunately, as required by law, funds, broker dealers, investment advisors, and financial services institutions make available their fee and expense information for current and prospective investors to analyze. The terms of ongoing expenses of investments are typically publicly available online in a prospectus, fact sheet, directly from the firm, or at your favorite financial news website.

It is helpful to be aware of how much you’re paying in ongoing fees because they can reduce the value of your portfolio over time. Not only does your account get debited for the fees, you also miss out on the ability to earn returns on those amounts for as long as you hold the investment.

Ongoing-Fees-SEC-Report

Utilize transparency regulations to your advantage and be aware of any fees, commissions, and other charges your account may be subject to.

FOR ALL AREAS OF INVESTING, TRANSPARENCY IS ESSENTIAL

In order to make the absolute best decision for your future, it is in your best interest to dig into as many important details as possible. And, in order to find the necessary details, your investments must offer transparency. If they do not, then the risks may be too great to consider.

Stock-based motifs are one example of investments that offer clear transparency on which holdings comprise each product. Select a motif from the catalog and quickly discover which stocks are included in each product. Transparency can also provide the opportunity to customize your investments. For example, Motif Investing offers the options to customize the holdings and weightings in existing motifs, as well as letting you create your own.

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