6 Elements of Prudent Financial Advice

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Many investors and their advisors are finding that investing today is more difficult than ever before. In times like these, the benefits of prudent financial advice are most evident, and the costs of poor decisions most clear. The following 6 elements of prudent financial advice can help guide investors and their advisors be successful during these uncertain times.

Prudent financial advice is about keeping clients disciplined and anchored to time-tested concepts such as broad diversification, asset allocation, and rebalancing.

Many investors and their advisors are finding that investing today is more difficult than ever before. Even properly advised investors are finding market volatility difficult to deal with right now. In times like these, the benefits of prudent financial advice are most evident, and the costs of poor decisions the most clear.

"It is human nature for investors to focus more on potential return than risk," says Dan Goldie, President of Dan Goldie Financial Services (http://www.dangoldie.com) an independent financial advisor to wealthy individuals and families in Menlo Park, California. "This is especially true after a long period of market prosperity. The opposite is true after big declines, however. In bad times, investors often want to pull in and avoid risk. Neither of these extremes is healthy because the emotional curve of investing tends to work against us as our emotions tell us to sell after declines and buy after increases."

According to Mr. Goldie, the antidote to this and other related challenges is to invest based on the groundwork of prudent financial advice. This kind of investing is not based on guesswork, but on financial principles backed by long observation and research. Mr. Goldie believes investors and their advisors should follow the following 6 elements of prudent financial advice:

(1) Recognize that Markets Work
It is important for investors to understand that capital market returns are out of their control. Securities prices will fluctuate as new information is continuously evaluated by investors and traders, creating an equilibrium in prices that reflect a trade-off between risk and return. Prudent financial advice is not about providing a forecast that attempts to predict the unpredictable. Investors and their advisors should not focus on what might happen next in the markets, but instead position their investments to try to capture as much of the return markets make available as possible. Investors can tilt their portfolios in the direction of certain risk factors to increase expected returns and re-balance when necessary, but they should resist trying to outguess the market. This could result in reduced returns and an increased likelihood of an undesired outcome.

(2) Manage Investment Risk
Some say we have become a society accustomed to immediate gratification and that we often want more than we should. Investors' desire for higher returns has led to the expansion of many new and riskier investment products. Some purveyors of investment vehicles have created such highly complicated strategies that the risks are nearly impossible to understand, even by professionals. For example, former Fed Chairman Alan Greenspan recently said that even with his advanced training in mathematics he did not fully understand Collateralized Debt Obligations, one of the most significant problem assets owned by troubled banks, pension funds, and financial institutions.

Prudent financial advice is about managing risk by designing an investment portfolio that is highly diversified and exposed to risks associated with higher expected returns. In other words, prudent investors only take on an amount of risk they feel is appropriate for them, and try to limit their exposure to those risk factors for which there is not a reasonable expectation of higher returns.

(3) Focus on Education
Investors who understand investments and how markets work are better able to appreciate the primary elements of prudent investing. Educated investors have the knowledge to make smart financial decisions and are less likely to fall prey to inaccuracies, misstatements, or other potentially damaging ideas they may hear from securities salespeople, the popular press, or other investors. Educated clients are also better able to decipher noise from information, and fact from opinion. A well educated investor is a more confident and more successful investor.

(4) Elevate Fiduciary Responsibility
Mr. Goldie believes that much of the investment industry's traditional way of doing business does not serve the best interests of investors. Any system whose revenues largely depend on persuading investors to trade and potentially take excessive risk is not likely to be focused on the best interests of the client. Such a system encourages short-term trading and speculation. I may also tend to promote the development of investment products designed to satisfy investor demand, which is often misplaced, especially at market extremes, rather than providing prudent investment solutions that are appropriate for investors.

Prudent financial advice is about structuring an investment strategy that is right for the investor, not one that reflects what an advisor is trying to sell, or what will earn the advisor the most fees and commissions. It should be designed to match each client's appetite for risk, while helping them reach their financial goals with broad diversification and excellent personal service.

(5) Retain Transparency and Integrity
The multiple scandals we have seen during this downturn illustrate the unrecoverable costs that can result from a lack of transparency and integrity on the part of an unscrupulous advisor. Prudent financial advice means operating in a clear manner that provides for the safety of clients' capital first and foremost. This can be accomplished by investing in properly regulated, publicly traded vehicles using third-party custodians to hold client funds and securities.

(6) Maintain Investment Principles
Too many investors tend to abandon their investment principles at just the wrong time. They may either take too much risk when things are prosperous and bad events seem unlikely, or too little risk after a major decline has occurred, possibly missing out on a subsequent recovery. Investors used to focus on the wisdom of long-term investing rather than the folly of short-term speculation. In recent times, however, Wall Street and other institutional investors have failed to regard risk properly. Instead of managing risk they magnified it with huge amounts of speculation and leverage.

According to Mr. Goldie, "Prudent financial advice is about keeping clients disciplined and anchored to time-tested concepts such as broad diversification, asset allocation, and rebalancing."

Mr. Goldie believes that prudent financial advice involves positioning client portfolios in investments for which there is a documented return for risk taken and avoiding those investments that, although may be popular at the time, are either too risky, unproven, or empirically unjustified.

Mr. Goldie suggests that, "This can often mean making decisions that are in conflict with your emotions, which is not easy. But investing has never been easy."

Dan Goldie is President of Dan Goldie Financial Services (http://www.dangoldie.com) an independent financial advisor to wealthy indviduals and families. He is located in Menlo Park, California. Investment Advisory services provided through Dan Goldie Financial Services LLC.

For further information contact:
Dan Goldie
750 Menlo Avenue, Suite 200
Menlo Park, CA 94025
650-566-1121
http://www.dangoldie.com

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