Recently I wrote a post with 6 tips for getting good investment advice from financial experts and media. For every financial expert opinion, there’s an opposite opinion, commonly within the same business news segment. This can be very confusing, even to someone who is proactive with her personal finances.
The first tip I shared is realizing that projected investment returns are based on probability. As an empowered financial woman, you need to be able to measure that probability with some degree of accuracy and satisfaction.
Any investment you choose to make, other than cash, is based on probability rather than certainty. Even cash is subject to loss from inflation and opportunity cost.
The probability you are seeking is that the investment advice is accurate most of the time; no system or method is ever going to be 100% accurate. Acceptance of probability is crucial with investing and growing your money.
How do you go about assessing probability? Here are a few tips that apply to both financial products and investment advice from money experts, such as newsletters and programs:
What is the past record of the investment performance?
What was the degree of loss during previous market corrections in that specific type of investment? This indicates just how wrong the advice was.
Did the investment rebound in the past, and if so, how quickly?
Has the investment program or method had strategy changes since the past corrections?
Did the investment decrease in value more or less than other investments in the same category with similar risks?
There are several complex and somewhat scary sounding statistical tools that are used to measure risk probability in comparison to another investment, known as a benchmark, such as standard deviation, alpha and beta. These common investment tools measure the volatility along the way to the end result.
For personal savings marked as long term investment money, I believe it doesn’t matter as much what money does along the way, so much as the end result. While volatility is certainly important for money that may be needed next month, for longer term money, it’s most important that the money be there at the time you need it, and that it grew as you had planned so that you can achieve your financial goals.
I like to keep things simple by looking at dollar amounts and time frame. This helps avoid the overwhelming feeling that can come from terms like alpha and beta. I compare this to tech talk, like html and binary; just hearing them makes me feel uneducated, yet I still manage to achieve the results I want from my computer. Now to have the dollar amounts I want within the chosen time frame!