-- "It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so." —Mark Twain
Managing your assets is a complex undertaking involving difficulties that many people vastly underestimate. Doing this effectively requires true confidence, which can only stem from overall financial awareness, perspective and extensive knowledge.
Yet confidence as an investor involves a paradox. Without it, you can’t be a successful investor because you’re too afraid of making the wrong moves. But too much confidence — often stemming from too little knowledge or awareness — may doom you to failure.
Though studies show that women tend to lack financial confidence, they tend to make fewer investing mistakes than men. That’s because men are generally more inclined to make mistakes stemming from overconfidence.
All investing involves risk, and lack of confidence can inhibit women from taking the reasonable risks necessary to succeed. So the challenge for women is to develop realistic confidence by increasing their financial knowledge as a key step toward financial empowerment.
For both men and women, financial education reveals the complexity of financial markets and the difficulties of making the right decisions concerning investments. Real financial education, then, is a humbling experience, and those who have it are more apt to approach the markets with great caution. By contrast, some who lack financial knowledge aren’t humble. Instead, they have hubris that causes them to make serious errors. Not only do they not know what they don’t know, but they may be dead wrong about things they think they do know.
Understanding financial markets and how best to approach them — for your particular goals and risk tolerance — is only part of the battle for financial success. Succeeding financially also involves managing your assets correctly to jibe with your tax scenario at different points in your life, your evolving cash-flow needs and your estate-planning goals. Thus, the weighty education burden grows even heavier for those seeking to comprehensively manage their assets as part of their overall financial lives.
As far as investment management is concerned, there are myriad concepts you must understand to do this without irretrievably damaging your portfolio. These include:
These points illustrate just a few ways that you can go wrong. There are many others, prompting many financially knowledgeable people to hire advisors. Studies show that people who hire advisors tend to have far more financial knowledge and thus are aware of the potential benefits.
If you decide to hire a financial advisor, it’s critical to determine whose interests the advisor is planning to serve, their own or yours. The best way to do this is to be sure that the advisor you’re considering is a fiduciary — a legal term meaning that they must always put your interests first. True fiduciaries don’t sell financial products, because this is a conflict with their advisory role; their only compensation is for their advice. Most advisors aren’t fiduciaries.
The federal government has been making regulatory moves toward requiring advisors to disclose whether they’re fiduciaries. But because this is a work in progress, consumers hiring advisors should take steps to determine this on their own. The best way to do this is to ask candidate advisors to sign a fiduciary oath as a requirement for hiring them.
Whether you handle your own investments or use an advisor, it’s important to always keep in mind that this is a daunting task involving a minefield that must be successfully traversed to reach your goals. This requires the kind of confidence that can only come from extensive knowledge and the awareness it brings.
Any opinions expressed here are solely those of the author.
Laura Mattia is a partner with Baron Financial Group, and a fee-only financial advisor. She's a Certified Financial Planner professional (CFP®), a Chartered Retirement Plan Specialist (CRPS®) and a Certified Divorce Financial Analyst (CDFA™) and holds an M.B.A. in accounting/finance. Her Internet radio show is Financially Empowering Women™ with Laura Mattia. Having worked as finance professor at the Rutgers University Business School, Mattia is doctoral candidate in financial planning at Texas Tech University. Her research is focused on understanding why women are not as financially literate as men.