Access and choice are not always a good thing. Investing has become too complex and overwhelming, with a myriad of choices and the endless stream of information that accompanies them. This is further compounded by the ease with which investments can be bought and sold. Confronted with this, many investors become paralyzed or impulsively buy and sell, in an elusive attempt to keep up.
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Many advisors use risk tolerance to determine how to allocate client assets, putting clients in buckets of conservative, moderate or aggressive based on the question “How scared are you?” This approach can result in poor risk management, significant misallocation of resources and a high degree of anxiety. A better approach is to use a needs-based planning process to match resources to client goals.
Focus on low-cost equity mutual funds has increased dramatically in the past decade. While cost matters, mutual funds, much like other goods and services, should be evaluated based on what investors get for the price they pay. Indeed, few people start shopping for a car by asking, “What’s the cheapest car I can get?”