MAKING CENTS: Who do you trust when it comes to your investments?

Have you earned your own trust? I recently signed on to a popular financial site, and there was one of those quick pop up polls. The poll was asking who you trust when it comes to your investments. Seventy-four percent of survey respondents said that they trust themselves first. Roughly 9 percent voted their dog as second and almost 7 percent said that they trusted their independent financial advisor.

It doesn’t take a math major to realize that the rest of the investment field combined only garnered about 10 percent of the survey respondents’ trust. Considering that nearly every day of the week I am presented with a do-it-yourselfer’s portfolio that looks more like a monkey and dartboard portfolio, I wonder how these self-trusting investors would rank themselves in terms of the quality of their do-it-yourself portfolios?

For those with enough courage, put your portfolio through some of the diagnostic and review tests that a professional would do, and see if you have earned the trust that many apparently have in their money management skills.

The first test most want to do is a performance test. Sure, performance matters, but relative performance is even more meaningful than absolute performance. Absolute performance means your actual raw returns expressed as a plus or minus. But relative performance takes that absolute performance number and asks questions regarding risk.

Exactly how much risk did you take in order to earn that rate of return? If you took abnormally high risk, and returned market-like returns, your absolute performance would not be very good. If on the other hand, you took very little risk and earned market-like returns or better, your absolute performance is good.

If you own only a few investments, you may have relative returns that look pretty good when examined in a vacuum, but then you must consider the risk of a large concentrated position. That inherently adds risk to a portfolio simply because of the inherent risk of any given single holding.

Next examine the volatility of your portfolio. Volatility is a measurement of instability or the range of expectations for your investments, either one-by-one or for your portfolio as a whole. Most individual investors have not been exposed to how much volatility may be inherent in their holdings. This may be enlightening to those with the courage to check.

It may also be wise to look at each individual holding, and examine how your holding compares with alternative holdings in the same industry, sector or country. If you learn that you have a dog compared to the alternatives available, consider a change.

John P. Napolitano is CEO of U.S. Wealth Management in Braintree, Mass., and 2012 president of the Financial Planning Association of Massachusetts. He may be reached at jnap@uswealthcompanies.com or on Facebook as JohnPNapolitano and US Wealth

John Napolitano is a registered principal with and securities offered through LPL Financial. Member FINRA/SIPC. He can be reached at 781-849-9200.

Securities offered through LPL Financial, Member FINRA/SIPC.

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