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Investment Objectives and risk

September 2, 2008

Mark on the Markets Mark Patterson

Investment objectives and risk

Almost everyday, I am asked to review a portfolio of investments that was constructed by a broker, or advisor using primarily mutual funds. What I usually see is a portfolio of funds that are either front loaded (commission), back loaded, or “C’ shares that are often slightly front loaded but have a large internal management and 12b1 fee, which is a trail commission to the broker.
In past articles I have discussed these loaded funds and pointed out reasons that I feel would be compelling enough to warrant avoiding these loaded funds, but I don’t want to beat an expired horse, so I would like to discuss the lack of investment objectives that I see in these portfolios, that can cost you much more than the 12b1 fees.
A well constructed portfolio has a purpose. Growth, current income, and capital preservation are the most requested objectives that we see as advisors. Most money managers have a model or plan to meet these objectives, while reducing risk. Far too often I see a portfolio of funds that are put together by a salesperson that doesn’t have the knowledge or experience to construct a portfolio that meets the client’s objectives.
For example; I have recently seen a portfolio that the client had told the broker that current income was needed, and that it had to come from their investments. The broker put them in high commissioned funds that were growth funds and not at all designed for income. The one income fund in the portfolio was a mutual fund comprised of bonds which had fees of 1.3% and was designed to yield about 4%, but was down 8%.
Logically, why would you take on market risk when the downside is so much greater than the upside potential?
My point is take risk when the upside is worth the potential downside, but mange that risk closely. If you look at some corporate notes that were designed to give a current yield of 7% and you are down 40% in the value of your note, I would say that is a poor risk.
Look at your portfolio and reassess the objectives and the potential risk to reward ratio and make those changes. I am not saying finding income or growth is easy in an investment environment filled with many landmines.
Do your research and try to avoid the “safe” investments that become risky.

Mark Patterson is a registered investment advisor and commodity trading advisor with MHP Asset management LLC, and can be reached at 447-1978 or Mark@MHP-Asset.com