Do You Know How to Play the Numbers Game?

When it comes to the financial world, the ideal is to succeed. But sometimes navigating your way through the financial world can be like walking on a tightrope, with a very thin line between failure and success. And like walking along the tightrope, your chances of success are affected by the levels of risk involved in every stage of the game. But what does risk really mean in the world of personal finance, and how easy is it to understand?

In terms of investments, the way that risk is presented often affects the way it is perceived. For example, when preparing financial plans, I look at the client's chances of success (i.e., dying with an estate worth X amount). If the chances of success are low, I look at factors that the client can control in order to increase his chances (i.e., increasing savings, decreasing spending, retiring later, etc.). If the plan shows high chances of success, I look at the factors that could be changed in order to improve the person's current lifestyle without harming anticipated future success.

What is a "high" or "low" chance of success? Unfortunately, there is no magic number. People's judgments about risk are subjective. One 50-year-old might be satisfied with hearing that he has an 80% chance of success, while another person might not sleep well at night until his odds of success have increased.

Which is riskier?

If I tell someone that he has an 80% chance of meeting his retirement goals, it may sound pretty encouraging. In fact, clients are frequently happy to continue with that status quo. However, in "real" terms, 80% translates to one in five people in similar situations where the clients outlive their money. I certainly wouldn't want to be that one!

People may not be enthusiastic about receiving 5% returns when inflation is 3%. But the same investor may be happy to get a 7% return when inflation is 5%. While both are receiving the same 2% real return, the second scenario seems like a better deal because the numbers are higher.

Don't let numbers lie

Don't be lured into a false sense of complacency just because a statistical simulation gives you X% chance of success in your financial plan. Think about the number that you feel you need to achieve in terms of odds of success. Before you accept a percentage of chance of success, ask yourself if this grade is really appropriate in your particular case. Remember - even if the market fluctuates, you play a large part in determining your financial success.

A Financial Advisor Can Secure Your Dreams

Ever since kindergarten, we have already been taught to dream big. We would take out our crayons and draw our future houses with a family, a car, and a pet dog named Rosie. Sometimes, we would even play dress up in the international costume of the places we want to visit in the future. As adults, we come to a realisation that in order to get hold of these, we need to work hard for it. Working hard and managing money to meet these goals, however, can get tricky at some point. This is why having a financial advisor can be beneficial in securing finances, and in turn, getting to our dreams. Here are a few tips in finding the right one for you.

Find someone you can trust. Be careful because it is easy for any person to say they are financial planners. Stick with the professionals with designations and educational backgrounds recognised by the state. It is safer to get references from friends and relatives to have an overview of the planner's capabilities. Also, check their certificates and do research whether their qualifications are legitimate. Hiring someone without checking his or her credentials is risky. They may not know what they are doing and put your money in the wrong investments that can deplete your savings or bury you with high fees. You do not want to entrust your future in the wrong hands.

The next thing to consider is what kind of financial advisor suits you according to your needs. Not all of them offer comprehensive advice from taxes to loans. There are types of planners that only focus on estate planning or on retirement. Find out which area of your finances you need help on and what you expect from the advisor. Also beware of those who are actually insurance salesmen tied to companies that offer advice just to benefit their businesses and increase sales.

When it comes to compensation, financial planners can be paid in three ways- flat fees, commission, or assets. Payment through flat fees is where you pay per visit or per hour. In commission, every time you purchase investments, a part of the total amount you pay will be deducted and that portion goes to your advisor. A fee based on assets are where planners charge you annually based on a percentage of profit you gained from the investment advice they have provided. Talk to your planner about this before sealing the deal.