Managing your own money is a lot like dating. There's that initial spark and energy that keeps things interesting for the first six months, but then something happens. You get complacent, you get busy with life, maybe stop bringing over flowers and texting less, and before you know it, you're having The Talk.

If you don't pay attention, the relationship can go awry pretty quickly. It's the same when trying to manage your investments. In my career as a financial advisor, I've seen plenty of folks pick and choose stocks and mutual funds on their own -- some make it, while others fizzle out. Those who fall short generally do so because they've ignored one of the four "P"s.

Man is upset because his stocks crashed.

Most investment portfolios fail for one one of four reasons. Image source: Getty images.


Not knowing how much a mutual fund costs is a like letting a small leak in a pipe go unfixed. The drip is small initially, but over time it does tremendous damage.

Investment fees tend to get overlooked because most investors don't directly pay them. Mutual funds charge an expense ratio that is debited from the fund directly or taken out of the performance. For example, if your fund gains 10% in a year but there is a 1% annual fee, then your account is up 9% after fees. Because mutual fund shareholders never pay the cost out of pocket, they're less likely to feel the pain of being charged fees. But fees can add up over time and fees can increase over time too. Be aware of what you are paying and make sure it is in line with other fund managers in that same category. For instance, if your large cap growth manager is charging 1% more than its peers, there better be a compelling reason why.

You can check a mutual fund's website for its fees and expense ratio before buying. In my opinion, it's not worth paying more than 1% for a mutual fund. Some funds are more expensive, such as international mutual funds, but you can still find good low-cost managers. Some fund carriers, such as Vanguard, offer cheaper versions of certain mutual funds if you meet a higher minimum investment. For instance, Vanguard's "Admiral" funds are cheaper than the "Investor" funds, but you have to meet the Admiral minimum, which is higher. Fees are a drag on performance, leaving less money to grow in the account and, once you start withdrawing funds, less income to work with.


Before you buy a mutual fund, look at its performance relative to it's benchmark over the past three and five years. Once you've invested, it's a good practice to compare your investment to its benchmark at least annually or semiannually. If you don't evaluate the performance of your investment regularly, you may be unwittingly holding a lemon, which means your money won't grow as it should.

On the other hand, if you check your performance too much -- say, daily or monthly -- then you run the risk of selling a position too soon and not giving your investment time to perform. Be sure to compare your investment to the proper benchmark, too. For example, compare an emerging-markets fund to an emerging-market index, rather than to the S&P 500, which wouldn't be an apples-to-apples comparison.

If you find the investment underperforming by a few percentage points over the course of one or two years, then that's cause for concern, and you should review why the investment is not performing as well. The right time to sell is not an exact science, and depends on the type of investment you own. For instance, if you own a stock that is underperforming the broad market, but you still believe in the company's growth prospects, then you may want to give the stock more time to perform. But if you own a large-cap growth fund that is underperforming similar large-cap growth funds, then you're unlikely to lose much upside by switching to another fund manager.

Paying attention

If there's anything that can sink an investment portfolio, it's not paying enough attention to it. If you pick a few mutual funds in your 401(k) and never look back, then your asset allocation -- the ideal mix of stocks, bonds, and other holdings in your portfolio -- will not keep up with changes in your life and your investing goals. For example, if you're just two years from retirement and still have 90% of your portfolio in stocks because you never changed your asset allocation, then a stock market downturn could take a huge bite out of the savings you'll soon rely on for income. This isn't such a big deal for younger investors who have time to wait out a market downturn, but I've seen plenty of people have to defer retirement and keep working while they waited for their 401(k) to recover.

Investors should also pay attention to style drift. Style drift is when a manager starts to buy stocks out of their expertise or out of their mandate. A large cap growth manager begins to buy value stocks for instance. This is a problem because you hired that manager to buy growth stocks, and you may already have a value manager elsewhere, which can lead to a lack of diversification. At least annually, check your mutual fund's top holdings via their annual report to see if they still fit the fund's objective. Also, mutual fund managers change from time to time, which is another reason to pay attention to your account. If there is a management change, is the new management team experienced? Do they have experience in the fund's sector or style? At least annually, try to review your investment's performance, asset mix, and fund managers to ensure that everything is where you want it to be.  

Poor diversification

Some investors pick a few mutual funds with different-sounding names and think they're diversified. But if you look under the hood, there's a good chance the funds all hold the same stocks. For instance, there is a high probability that a large-cap blend fund and a large-cap growth fund both own similar stocks. If that's the case, how diversified are you? Diversification works best when your underlying stock mix is varied. The more different stocks you own, the better the odds that some companies will perform well when others don't.

For instance, Proctor and Gamble may do relatively well in a recession because it sells basic necessities, but Apple may suffer when consumers have less disposable income to spend on high-end gadgets. If all your stock holdings are in the same industry, then you're really not diversified, and your portfolio may be overexposed to one sector, which can get ugly if that sector falls out of favor. The key is to assemble the right mix of stocks. Consider buying different styles of funds such as large-cap and small-cap, value and growth, and make sure your investment is also spread across as many industries as possible.

In addition, traditional U.S. investors typically have very little money in international stocks. We call this "home country bias" in the investing world. We all have a natural inclination to trust what we know -- in this case, companies based in our home country. But the world is a big place, and ignoring international stocks means ignoring some big names like Nestle and Novartis, which are headquartered abroad. International stocks may also help diversify your portfolio, as foreign stocks expose you to different currencies, different economies, and different governmental policies, all of which help to diversify and reduce the risk of your investment. 

Like they used to say, you have to mind your "P"s and "Q"s -- or, in this case, at least the "P"s. Be aware of the price you're paying for your investments, pay attention to your account and make sure the asset mix is right for you, check your investments' performance against their benchmarks, and finally, make sure you're properly diversified. Nailing these four fundamentals puts you in a much better position to succeed in the long run.