Money Magazine Ask the Mole

Missing the boat on international funds

If your adviser is only now recommending you move some of your portfolio into global stocks, it might be time for a new adviser. Watch out for these red flags.

EMAIL  |   PRINT  |   SHARE  |   RSS
 
google my aol my msn my yahoo! netvibes
Paste this link into your favorite RSS desktop reader
See all CNNMoney.com RSS FEEDS (close)
By The Mole, Money Magazine's undercover financial planner

the_mole_illustration.03.jpg
SUBMIT

NEW YORK (Money) -- Question: I read your recent article in Money magazine regarding the craze for international investing. This past week my adviser has recommended this move since I have very little money in the international market. She recommended Nationwide International Growth Fund (GIGAX) and the Ivy Asset Strategy Fund (WASAX). What do you think of her advice?

The Mole's Answer: Boy, are the red flags waving. I see at least three warning signs that it's time to start looking for a new adviser.

Red Flag #1 - Previous lack of international stocks

I would first start by asking your adviser why you currently have so little money in the international stock market. We've been a global economy for many years and I'd want to know why your adviser thought putting all of your eggs in a basket of U.S. stocks was the right thing.

When your adviser picks which asset classes she thinks will outperform others, all she is doing is creating unnecessary risk for you. She apparently bet on U.S. stocks which, between 2003 and 2007, earned a nice 82% return. Unfortunately, international stocks more than doubled that return at 168%. In other words, it may have been your adviser's bet to put little of your portfolio in international stocks, but you're the one it ended up costing.

Red Flag #2 - Classic signs of performance chasing

A good adviser can help provide some focus and discipline to your portfolio. Part of that discipline should be to stop you from chasing what's hot. A recent study showed that advisers as a whole performance chase about as much as individuals. That's because it's easier to sell something that's hot than something that's not.

The fact that your adviser is suggesting you get into international stocks after such hot performance, and after underweighting you in international stocks for so long, looks like a sure sign of performance chasing to me. And performance chasing has you taking the old buy high/sell low path that I would avoid like the plague.

Red Flag #3 - Funds that generate high fees

Both funds your adviser recommended have front-end loads that charge as much as 5.75% of your investment the minute you buy the funds. So you start with only 94.25% of the amount you originally invest. Further, their annual fees range from 1.13% for the IVY fund, and 1.57% for the Nationwide fund, according to Morningstar. Fees like those make me cringe.

Plus, both of these funds happen to have turnover well above 100% annually. This means they hold a typical stock for less than a year. The high turnover does two things:

  • It creates additional hidden expenses from trading stocks frequently.
  • It creates taxes from any gains - and at the highest short-term rates.

Now if your adviser is reading this, she is probably steaming mad and saying to herself that these two funds actually have very high Morningstar ratings and have whomped their peers. While she is absolutely right, that is yet another indication of performance chasing.

Any adviser can screen for the funds that pay us commissions and have performed well in the past. With thousands of mutual funds out there, it's nearly a mathematical certainty that some expensive funds will do well. Some advisers will seek out these funds and sell them to clients, even though the data is compelling that the odds of the stellar performance continuing are quite low.

My advice: Ask your adviser why now is the right time to go from virtually no international stocks to dramatically increasing your allocation. As uncomfortable as it might be, ask her if it is performance chasing that is driving her recommendation. Finally, ask if there are lower fee vehicles that can be used to build your portfolio.

International investing is a critical component of most portfolios, but owning a consistent proportion is far more critical than moving in and out. Performance comes and goes but fees are forever, so do all of your investing with low-cost and broadly-diversified vehicles. And that holds true whether you use an adviser or do it yourself.

The Mole is a certified financial planner and certified public accountant who - in the interest of fairness - thinks you should know what goes on behind the scenes in financial planning. Want to make contact? E-mail themole@moneymail.com.  To top of page

Send feedback to Money Magazine
Features
They're hiring!These Fortune 100 employers have at least 350 openings each. What are they looking for in a new hire? More
If the Fortune 500 were a country...It would be the world's second-biggest economy. See how big companies' sales stack up against GDP over the past decade. More
Sponsored By:
50 years of the Ford Mustang Take a drive down memory lane with our favorite photos of the car through the years. More
Cool cars from the New York Auto Show These are some of the most interesting new models and concept vehicles from the Big Apple's car show. More
8 CEOs who took a pay cut in 2013 Median CEO pay inched up 9% in 2013 to $13.9 million. But not everyone got a bump last year. Here are eight CEOs who missed out. More


Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer LIBOR Warning: Neither BBA Enterprises Limited, nor the BBA LIBOR Contributor Banks, nor Reuters, can be held liable for any irregularity or inaccuracy of BBA LIBOR. Disclaimer. Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.