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By Judy Hulsey
When sensational news stories are employed by the media to motivate us to action, poor decisions can be the result. This media “noise” can distract from the real story, and without discretion, it’s easy to be led astray by information that lacks credibility. Good investment decisions are the result of careful consideration, and research has shown women are better at tuning out the “noise,” making well-informed decisions and not reacting to pressure by taking risks.
Making Good Decisions in the Midst of Conflicting Messages
Some women believe they are not capable of making wise investment decisions. Perhaps they have always relied on the advice of others who they believe are smarter investor. Under normal conditions, both men and women can be data-driven and decisive. However, when under pressure, men are likely to take greater risks while women seek additional information to make more careful decisions.
With some education and knowledge, especially from a financial advisor, women can learn to make strong investment decisions for themselves.
Making Better Investment Choices
Investment advisors should hear your concerns, provide education and information, and bring a tailored approach to empower you in making better investment choices. Advisors should help you differentiate between valuable information and noise as it pertains to your investments. Making better investment decisions also involves managing risk.
Choosing an investment goes beyond completing a risk profile questionnaire. Investments should be specific to your situation—avoid making investment decisions based on the herd mentality. Advice provided on the news or offered by a friend does not necessarily translate into making sense for you. Find an advisor you are comfortable with who listens to your needs, understands your situation and can give you professional, objective advice.
For women just starting out as investors, here are some of the most common questions financial advisors get asked:
1. How Do I Approach the Risk of Investing?
There are several types of risk, but two are most prominent: inflation risk and portfolio risk. (For related reading, see: Risk and Diversification: Different Types of Risk.)
When our money or investment portfolio does not keep up with increasing costs of living, we experience inflation risk. This means we are, in effect, losing money as we cannot afford to purchase the same goods with the same amount of money.
Portfolio risk is also known as volatility. Extreme volatility hurts a portfolio despite a mathematically good rate of return. You can have a higher average return and still earn less money than you might on a portfolio that is more stable with a lower average return.
In the example below, both investments had an initial deposit of $100,000, but Investment 1 was more volatile than Investment 2.
As you can see, although the first investment shows a greater average return, the second investment actually results in a higher account balance. Seek to minimize portfolio volatility within your risk profile and portfolio allocation.
2. What Are the Pros and Cons of Index Funds?
Index funds are great for those who are not going to seek professional advice and those who want the lowest fees. While you might save money on fees, investments in index funds expose you to the downside swings of the indices. For instance, when the market drops 36%, as it did in the S&P 500 in 2008, so does your index fund. Is the lower fee justified by the risk? It depends upon how volatile you want your portfolio to be. (For related reading, see: How to Diversify With Index Funds.)
3. Why Would I Ever Want to Pay a Fee?
Fees are important, but they are not the most important consideration. No one wants to pay unnecessary fees, however, people are often less attentive to the rate of their returns and the risks of their investments and too focused on reducing fees. Because you get what you pay for, you might opt to pay a little more in fees for a better result than less for a lower quality product that might cost more in the end. There are money managers who are expensive relative to others in the industry, and at a glance, it might seem imprudent to spend more. But if that manager outperforms others, it might be worth paying higher fees. At the end of the day, focusing on the net result in your pocket rather than just on fees can go a long way.
Who likes paying fees during market downturns? No one, of course, but there’s more to the story. Again, the number one priority ought not be the fee, but rather what you get for that fee. For example, if you are in the S&P 500 and the market goes down, your investment goes down at a similar rate. By utilizing the expertise of an alert money manager, your account is likely to experience less risk and much less loss during a downturn. Their attentiveness to your investment is worth the fee. (For related reading, see: Signs You Need a Money Manager Now.)
There are two types of investment fees. Explicit fees are the ones reported on your account. Implicit fees are embedded in your investment. Typically, both fees are present. Be very concerned when anyone tells you there are no fees.
4. What Is the Best Attribute of an Annuity?
The guarantees of an annuity are its best attribute. At the very least, an annuity ensures your principal upon death, minus any withdrawals. In addition, you can purchase extra features such as guaranteed withdrawals (income) for life. However, you have to look at those additions closely in terms of price and need.
People are often sold options that sound great but are not necessary. So, while an annuity might make sense, it’s important to look at the full financial picture, because they are not very liquid and the cost may be high for what you receive. Annuities tend to make the most sense for an individual who may be sued, has poor spending habits, has money to pass on to the next generation, or experiences mental challenges. (For related reading, see: Beware of Annuity Salespeople and Their Tactics.)
5. What Does Losing Money in the Market Really Mean?
Markets will go up and markets will go down. If you are concerned about losing money in a downturn, you would do well to reevaluate your risk tolerance and time horizon in those investments. Money expected to be used in five years is typically considered reserves or savings, not an investment.
Educate Yourself and Use a Trusted Expert
Education matters. Some people, including those with a financial advisor, frequently take on more risk than necessary. Given the importance of money in our lives, it is vital to have a clear understanding of investing and to work with a person you trust to manage your investments. Being a nice person does not necessarily qualify them to manage or understand the cyclical nature of an investment or give them the ability to create an appropriate portfolio for you.
(For more from this author, see: 7 Questions to Ask a Potential Financial Advisor.)
Disclosure: The information provided here is of a general nature and is not intended to answer any individual’s financial questions. Do not rely on information presented herein to address your individual financial concerns. Your receipt of information from this material does not create a client relationship and the financial privileges inherent therein. If you have a financial question, you should consult an experienced financial advisor. Moreover, the hiring of a financial advisor is an important decision that should not be based solely upon blogs, articles, or advertisements. Before you hire a financial advisor, you should request information about the financial advisor’s qualifications and experiences. Past performance is no guarantee of future results. All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed. Examples provided are for illustrative (or “informational”) purposes only and not intended to be reflective of results you can expect to achieve. Judy Hulsey (“Judy”) works with Allgen Financial Advisors, Inc. (“Allgen”), which is an investment advisor registered with the SEC. Neither Judy nor Allgen provide personal financial advice via this material. The purpose of this material is limited to the dissemination of general information regarding the services offered by Judy and Allgen. It is not intended to be a solicitation or offer to sell investment advisory services to residents of any state in which Allgen is not currently authorized to do so. The Disclosure Brochure, Form ADV Part II, which details the business practices, services offered, and related fees of Allgen, is available upon request.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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