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Reduce Porfolio Leaks

posted Feb 18, 2014, 8:30 PM by Tim Isbell   [ updated Feb 19, 2014, 11:37 AM ]
Last spring I discovered a big pool of water under our house. I narrowed it down to the feed line to a landscape irrigation system by noticing that the small red triangle icon on our water meter moved just a tiny bit in 30 seconds. For a better idea of how much water was leaking I switched to a non-leaky line that carried water to the hose at the front of the house. Then I very carefully adjusted the faucet until the little triangle turned at about the same rate. The water dribbled through the hose and onto the concrete, where it very slowly wet an expanding circle. I couldn't believe that was enough water to explain the pond under the house. The professional plumber looking on confirmed that this was not the source of water for the pond.

Still, I wanted an accurate measure of how much water was leaking. So I read the meter accurately, then we all left the house for 2 hours. When we returned I read the meter again, and did some math. The tiny leak computed to 25 gallons every 24 hours! That's 175 gallons every week leaking under our house - with no way to escape. The professional plumber was wrong to say the leak was too small to matter.

Investment portfolios leak just like this, and many financial professionals assess the problem as inaccurately as my (also expensive) plumbing professional. A little 1% leak in our portfolio here, and a half-percent leak there, doesn't seem like much. But over time these end up costing us a lot of money.

For example, if our $100,000 portfolio's underlying asset allocation of stocks and bonds grows 8% per year for 10 years we should have a $215,892 portfolio. But if our portfolio leaks 3.5% per year we only have $155,297. That's a $60,000 leak! If this goes on for 20 years, the loss computes to $225,000. In retirement these leaks cost us several years of living money! Very few of us can afford to let this happen! 

For more about these leaks and what you can do to reduce them, click on Reduce Portfolio Leaks.

All the best,


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