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6 Tips for Making Smart Financial Decisions

Posted by Michael Kane on Oct 21, 2016 1:03:30 PM
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smart-financial-decisionsJust like the fields of aviation and technology, the world of finance is complex and constantly evolving. Throughout your life, you’ll have to make key decisions that can significantly impact your financial future.

Because every individual has different needs, goals and priorities, there is no ‘one-size-fits-all’ answer when it comes to managing your money, but here are six tips that will help you in the process.

1. Don’t let emotions control your decisions

One of the most detrimental things you can do is allow your emotions to influence your financial decisions. The truth is money and wealth is personal. When dealing with a tough decision, it can be hard to separate your feelings from logic.  Your emotions may push you in one direction when logic dictates another. It’s easy to get caught up in breathless media reports about the hottest IPO or the latest strategy being touted by financial “experts.” You don’t want to miss out on something that everyone else seems to know.

The reality is that successful investors are able to see both the long-term and big picture implications of the financial decisions they make. They are far less likely to be impulsive by chasing performance numbers, and much more likely to create and follow a strong plan. Working with a trusted advisor helps create a healthy detachment from the more emotional aspects of your financial decisions and helps ensure that you achieve your financial goals.

2. Know your tolerance for risk

As we have quoted before, economist Paul Samuelson famously said, "Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas." This statement perfectly captures the element of risk, one of the most frequently misunderstood concepts in finance. Knowing your true risk tolerance will not only help you make better financial decisions, it will also help you remain calm when short-term events cause disruption in the market.

Not all risk is bad. In fact, taking on the appropriate amount of risk can open up opportunities to preserve and grow your capital. But if your investments are keeping you up at night, chances are you’ve taken on more risk than you should, and that can lead to emotionally driven decision-making resulting in selling at historical lows or buying at inflated highs.

3. Understand downside risk

Risk tolerance tends to go hand-in-hand with downside risk. You should know what it means and how much downside risk you’re willing to take on in order to make the best financial decisions. For example, if you purchase a stock, the amount of downside risk is somewhat limited. Say you buy a $50 share of stock, the stock tanks, and you lose $50. That is the limit of your downside risk.

Now imagine one of the more extreme examples of downside risk, the hedge fund that invests in short positions. If you short a stock and its value continues to go up, you could theoretically face an infinite potential for downside risk. While the returns on such investments can be significantly higher, the risk is considerable.

4. Do your own research

There was a time when only professionals and insiders had access to the financial data required to manage money. You had to trust in what you were told and hope for the best. Unfortunately, there were (and still are) people who try to take advantage of those who don’t do their own research, especially if they are selling a particular product or strategy. It’s possible that what they’re selling is completely wrong for you, but they might tell you anything if it means a commission or bonus for them.

Fortunately, the rapid pace of technology means that investors and the general public have near real-time access to information. You can investigate the claims of those who want to help you make financial decisions, and make sure their advice is aligned with your financial and retirement goals.

5. Know that if something sounds “too good to be true,” it probably is

As professional advisors working closely with airline crew members, we’ve heard some unbelievable stories from prospective clients about promises others made to them while trying to sell certain financial products. Here’s just a sample:

“It’s an annuity, 7% return guaranteed, no risk! What could possibly go wrong?”

“Yes, it’s options and derivatives, but we have a special formula that eliminates downside risk!”

“I know a guy that knows his stuff, and he says . . .”

“It’s a CD at a bank paying 8%. There’s no risk, it’s insured!”

It goes without saying that if something sounds too good to be true, it probably is. This is the reason many of our other tips, such as conducting research for yourself and understanding risk, are so important.

6. Always check references

This is such a simple tip, but it’s one of the most neglected aspects of making the right financial decisions. There are people who won’t shop at a store or see a movie without a recommendation. You would never hire a caregiver or a babysitter without thoroughly knowing their qualifications.

As with all other important and valued aspects of your life, take the time to check references of the people with whom you do financial business. Internet research, colleagues and trusted advisors are all excellent resources to ensure that those you work with are trustworthy, reliable, and have your best interests at heart.

Financial decisions, especially those centered on the preservation of assets and growth of capital, can be emotionally and intellectually difficult. Follow these guidelines to help you make good decisions that simultaneously achieve your goals and help you sleep better at night.

We understand how difficult it can be to trust someone with your financial future and to fully understand the value of all the services we provide. You don't have to take our word for it. Our clients are happy to discuss their experiences with you. Request a reference today to learn why the clients that choose us, stay with us.

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Disclaimer: This blog is intended for informational purposes only and should not be construed as individual investment advice. Actual recommendations are provided by Retirement Advisors of America following consultation and are custom-tailored to each investor’s unique needs and circumstances. The information contained herein is from sources believed to be accurate and reliable. However, Retirement Advisors of America accepts no legal responsibility for any errors or omissions. Investments in stocks, bonds, and mutual funds may increase or decrease in value. Past performance is no guarantee of future results. Any of the charts and graphs included in this blog are not recommendations for the purchase and sale of any security. 

Topics: Financial Planning