Americans spend hours agonizing over how to improve their financial situation now and for the future. If you're not sure how to manage your investments, check out how these financial planners recognize 10 commonmoney mistakesin 10 minutes or less -- and how they help create a cure for each.
1. Overpayingfor mutual fundsIf your money is invested in actively managedmutual funds, chances are, you're overpaying your investment advisor. While many investors double down on active advice in an attempt to beat the overall market, research shows that it's a losing strategy. Aportfolio of low-cost index funds is likely to outperform 97% of actively managed funds.
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That's why Sophia Berra, a certified financial planner and founder ofGen Y Planning,seeks out low-cost exchange-traded and index funds for her clients. "Managed mutual funds generally have expense ratios above 1 percent," she said. "You can cut your expense ratio in half by switching to low-cost ETFs or index funds."
Some have fees of less than 0.25%, she added.
2. Owning too much of your employer's stockMany public companies offer a corporate stock discount to employees. This can be a great job perk, but it can also be problematic for those who fail to diversify the remainder of their investment portfolio.
Many employees "often assume that, because they are familiar with the company they work for, they know how the company's stock will work," said Jeffrey A. Bogart, a registered investment advisor withSila Wealth Advisory. Unfortunately, that's not always the case. Seemingly successful companies sometimes unexpectedly crash and burn. Remember Enron?
An over-concentration in your employer's stock can be particularly dangerous for those nearing retirement, said Bogart. "If the company crashes at that time," he said, "the person is going to be working at Wal-Mart until they die."
Bogart suggested that investors hold a diversified portfolio, which can help mitigate the ups and downs of any one particular stock or sector. "Investing should be boring," he added.
3. Holding excessive mutual fundsOwning more than 10 different mutual funds could be a problem, said Rob Aeschbach, founder ofThe Military Financial Planner.
"I find that many of the mutual funds own the same underlying securities," said Aeschbach. "The client might have 12 different funds, but they all own Apple, Microsoft, Ford, and so on."
Consequently, a portfolio might not be as diversified as the investor believed so the risk is greater than expected. The financial planning fix involves a review of the holdings within each individual mutual fund, which can easily be found online at Yahoo! Finance or Morningstar. "An efficient, effective portfoliomight need as few as three or four different mutual funds," said Aeschbach.
4. Missing out on a 401(k) matchPassing on your employer's retirement plan match is akin to casting aside free money. It was there for the taking, said Greg Smith, a certified financial planner and managing director atThe Wise Investor Group at Baird. "By not taking advantage of the company match, you may be unwittingly delaying your point of financial independence."
In addition, he said, when you contribute to a 401(k), your income is reduced by the amount of your contribution and "so too are the taxes that you'll pay." Conversely, if you have access to a Roth 401(k), you'll forego an immediate tax benefit but can potentially profit from tax-free earnings over the lifetime of your account.
"Your future self will thank your present self," Smith said.
5. Failing to budgetMany financial advisors say that their clients don't often know exactly where they spend their money, which can prevent them from reaching their financial goals. So what does a financial advisor do about this money mistake? Jamie Ebersole, founder and CEO atEbersole Financialin Wellesley Hills, Mass., recommends that clients get back to basics and start tracking the dollars they spend.
"This can be done easily on an excel spreadsheet, through a service like Mint.com or on your personal checking account web page," he said. "Without this clarity, we don't know where we can cut our expenses or if we are overspending on certain non-essential items like clothing or eating out. More important, we don't know how much we have left over at the end of the month to allocate toward our savings goals."
6. Meager retirement savingsThe vast majority of working households are dramatically unprepared for retirement, according to arecent reportby the National Institute on Retirement Security.
"We work for at least 25 to 35 years of our lives. Most people just keep putting off contributing to their portfolio, saying they will do it when they have money," said Kassi Fetters, a financial planner withFetters Financial Services.
Fetters suggests a 15% contribution to retirement accounts, at least as a start. "You need to actively figure out how much money you will need monthly in retirement, set that number, then calculate how much you need to contribute monthly to get there. It is a simple process but will set you up for wealth in the future," she said.
7. Keeping municipal bonds in your IRAMunicipal bond interest is generally tax-free. But Chris Chen, a certified financial planner withInsight Financial Strategists, said that having them in a retirement account makes the interest taxable as ordinary income.
What's the financial planning help? "Check yourretirement accounts," said Chen. "If you have munis or muni funds in there, sell them and replace with an equivalent that is taxable."
Corporate bonds often come with a higher interest rate, he added, so you may end up making more money out of that trade. Conversely, he said, "If you have funds in taxable accounts, you can purchase munis or muni funds there, thus giving you tax-free income."
8. Too little cash on handWithout an emergency savings account in place, you could end up in a severe cash crunch if the roof leaks, the car breaks down or you unexpectedly lose your job. What does a financial planner do when he identifies this money mistake? Smith said it's important to know how much cash you need. "Is it three to six months' worth of spending? Or is it six to twelve months?" he asked. If there is another income earner in your household, the lower level may be sufficient. If you're the sole income earner, however, you may need to raise the bar.
9. Not enough insurance coverage"Many clients take the default position of accepting the life and disability coverages offered by their employer. In most cases, these policies do not come anywhere near the level they need to in order to protect their families' interests," said Ebersole.
Does your insurance pay enough to cover your children's college expenses, pay off the mortgage in full, or replace 20 years or more of lost income? "Probably not," said Ebersole. "We all have an aversion to thinking about bad outcomes. But having proper life and disability insurance in place can give you the sense of well-being that comes from knowing that your family will be protected in the unlikely case that something bad happens."
10. Failure to rebalance a portfolioOver time, as certain investments perform well and others stay the course or even lose value, an investment portfolio can easily drift from its target allocation to one that's unintentionally out of balance. This can increase an investor's risk profile.
How does it happen? "Investors have a hard time selling winners and losers," saidCary A. Guffey, a certified financial planner with PNC Investments in Birmingham, Ala.
It's easy to assume that an investment that's done well before will perform well again, and vice versa. Unfortunately, that's often not the case. "Rebalancing takes some of the emotion out of investing," he said.
This article originally appeared on GOBankingRates.com.
The article 10 Money Mistakes a Financial Planner Can Find in 10 Minutes originally appeared on Fool.com.
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