Decrease Your Risk by Understanding Your Investments

• The first question is easy to answer, and it’s easy to use to compare various money managers.
• The second question, on the other hand, is easy to discount due to the fact that it’s necessarily going to be answered in far less objective ways.

If you’ve spent any time reading the purported strategies of mutual funds, you know that the bulk of them are nearly identical (“Invest in proven companies that are leaders in their industries,” “Invest in equities that we feel are attractively priced,” etc.). Given how similar–and how obvious–these statements are, it’s no surprise that we don’t put a lot of value in them.

However, to ignore them is a mistake. Before turning our money over to somebody, it’s important that we know what they intend to do to earn their pay. (“Their pay” = the excess of their costs over the costs of an index fund). And if their argument isn’t convincing–or if we don’t understand it–why entrust them with our money? There are always other options.

As Warren Buffett says, “Risk comes from not knowing what you’re doing.” If we’re going to turn our money over to somebody, let’s at least make sure we understand what they’re going to do with it.