Broad Ambiguous Answers Hurting Investors

Broad Ambiguous Answers Mean Less Control For Investors, Higher Profits For The Investment Industry

By: Brendan Magee

A gentleman I know has a reduced breathing capacity. His lungs have a hard time producing enough oxygen. As a result there are times when he needs an oxygen machine to help him breath. The question is how does he know when he needs to use the oxygen machine? The answer is, his doctor gave him a device that mathematically measures the amount of oxygen his lungs are producing. If the machine registers an 88 or higher he doesn’t need to use the oxygen machine. It’s the mathematical measurement of the machine that enables him to be in control of his oxygen level. Without it he’d just be guessing and there wouldn’t be a whole lot of comfort in that.

Now we would all agree that breathing and our ability to produce oxygen is pretty important, and it’s something, we really don’t want to be guessing about. There’s just  too much at stake. Unfortunately, when it comes to investing far too many of us have been conditioned to accept broad ambiguous answers to questions that require precise mathematically measured answers. The result is investors are left guessing and they’re making huge mistakes.

For example, risk is an important aspect of investing. When most investors respond to a question of their risk tolerance, they’ll place themselves in one of three categories, conservative, moderate, or aggressive. Why is this? Perhaps, it’s because a past experience. Another reason is, investment companies administer these tests with the premise that it will help the investor to determine what their risk tolerance level is. In either case, the investor is left with a broad ambiguous answer to a very important aspect of investing. There is nothing in these answers that gives an investor an ability to mathematically measure the risk of one investment vs. another.

For the investment industry these measurements make it easier to sell products. Because no matter which category an investor falls in, there’s an already put together set of investment products that match your category. Unfortunately, the investor doesn’t get anything that tells them exactly how much risk or what they should expect in returns. They’re left to deal with those two answers on their own.  The result is investors finding that investments they thought were conservative were a lot more volatile than they thought.  Also, investors have no real clue as to whether or not they’re returns are acceptable or not.

Case in point, a couple I met a while ago, who was within six to eight years of retirement, saw their portfolio lose $132,000 in two months.  What made the loss all the more difficult to deal with was that they had recently met with their financial advisor and based on their anxieties over the stock market, he moved them into more “conservative” investments. Now they became downright irate when they finally got a mathematical measurement of the risk they assumed with their conservative portfolio. They couldn’t belief how much risk they had assumed.  They said if they had known that before, they never would have invested their money that way. Here the keep the investor in the dark approach helped the advisor sell the couple an investment product, but gave the investors no way of knowing how inappropriate the products were to their circumstances.

So besides risk, what other aspects of investing can and should be measured? Expected rate of return, level of diversification, and expenses would be critical for any investor to have measured. If you cannot put a mathematical number to these parts of your portfolio this should be a huge red flag.

Brendan Magee is the founder and president of Inevitable Wealth Coaching. With questions, comments, or suggestions call 610-446-4322 or send an e-mail to Brendan@coachgee.com