Factors about The Savings Investment Process

One of the most important moments in managing your savings is the investment decision in products / financial instruments. A reasoned and conscious decision-making process starts from the knowledge of one's own preferences in terms of risk, their skills and objectives, as part of a broader financial planning process.

 The data collected on the investment behavior of families reveal the limited skills of people in financial matters - both with respect to both understanding and decision-making models. These limitations are manifested primarily in the lack of awareness of the factors to be considered before investing i.e., objectives, time horizon, expectations, and financial skills to bear any losses. Only 24% of investors consider the time horizon important; just 18% of the targets; a very low percentage (15%) declares to take into account their own economic capacity to take risks. The characteristics of an adequate investment decision-making process are not known to about 40% of the sample investigated; about 60% of respondents do not know any of the investment services required by current legislation.

 Nonetheless, over half of the retail investors say they make choices by trusting the advice of family, friends, and relatives (i.e., using informal channels); only 25% use a consultant professional. The key elements that encourage participation in the financial markets are the ability to buy products with a minimum guaranteed capital and/or yield and trust in intermediaries. The factors that discourage participation in the financial markets are the lack of savings to invest (reported by 60% of investors), the fear of incurring capital losses, and exposure to market trends (20% and 15%, respectively).

The lack of knowledge and skills, therefore, reverberates in suboptimal investment choices (sometimes induced by proposals of financial intermediaries in the conflict of interest). Let's now look at the Factors to keep in mind about the savings-investment process.

The choice of the intermediary. 

The lack of skills of people does not advise a "do-it-yourself" approach to investment strongly. Selecting an intermediary who can provide assistance in the investment decision-making process and in monitoring the financial portfolio is a necessary operation, which requires time to acquire information on the services provided, on costs, on how to reporting, etc. A comparative analysis between multiple intermediaries is strongly registered mail. 

Before investing, the financial profile of the saver must be defined. 

This is an essential starting point for making a coherent and conscious choice of the financial risks they intend to bear. Intermediaries have an obligation to track the financial profile of each saver to whom they provide investment services. This presupposes an exchange information-information between customer and intermediary on the investment objectives of the customer himself, on his risk appetite, economic and financial situation, on the identified or desired time horizon of reference and other, that is, on all the elements that constitute the client's subjective "background."

The choice of the product / financial instrument in which to invest one's savings must be consistent with the financial profile of the saver.

On this point, it should be mentioned that it is not enough for a saver to acquire information on the characteristics of the investment product; a typical saver is not able to elaborate and understand them correctly. Often, the non-competent saver acts on the basis of suggestions (past returns, word of mouth, advice from friends and relatives, etc.), that is, based on emotional reactions. A classic example of the "psychological trap" in the investment decision phase financial is made up of the different impacts they can have on the saver different representations of the same information. This is called framing effect (literally, "classification"); the methods of presenting information (graphic format, emphasis on positive or negative aspects, etc.) can guide the perceptions of the reader's risk and influence their decisions. 

The lack of awareness in terms of personal needs, psychological attitudes, risks, opportunities, rules and technical instruments in economic and financial matters, is a harbinger of inducing the saver to be erroneous and harmful decisions or, for other reasons towards, to make him subject-weak in the relationship with incorrect intermediaries.

In an orderly way of making decisions, the saver must request prior information on the type of investment, on the characteristics of risk/return, on the immediate and expected periodic costs, on the conditions of liquidity of the financial product in the case of first divestment of any expiry, and on the existence of any contractual provision events or conditions that can "alter" the monetary value of the product itself. Exploratory questions to ask the intermediary can be the following:

• How much they make alternative investments potentially less risky, such as for example government bonds of the same maturity?

• What is the expected return on the product offered net of investment costs and tax withdrawal?

• It is possible to express expected returns and costs in monetary terms of the investment (for example: if I invest 100 dollars, how much I will have accrued between one year / 2 years / 5 years net of costs and tax levy?

 Much attention must be paid to investments in financial instruments complex, particularly difficult to understand with regard to the underlying risks, tools financial derivatives ABS, CDO-squared, perpetual bonds, so-called securities hybrids, structured bonds, certificates, etc.

The information presented in the information documents must be "critically" assessed or received by the intermediary and try to check if you have understood what you have read or heard. It is important to know that the intermediary acting as a consultant and/or manager whose duty to assess whether the financial product it proposes is suitable to the needs and characteristics of the saver who intends to invest. In other terms, it must assess its suitability for the profile of the saver. In the case of the recommended product, the saver must receive by the intermediary the representation of the reasons why the product is deemed adequate to the financial profile of the saver himself.

The importance of monitoring the investments made (portfolio financial). 

Over time, the characteristics of the chosen product may change (yes, think about the solidity of a bond issuer), and needs may change of the saver. The adjustment of the financial portfolio must proceed through an examination of all the other parameters considered above. In any case, it is good practice not to react in an automatic way to the short-term results of your investments. Also, in this case, "behavior traps" and "mental shortcuts" can lead to respond unreasonably to external stimuli. It is, therefore, necessary to reflect and ponder subsequent choices, possibly with the help of an expert. The investments made are an integral part of an overall financial plan, which is instrumental to the realization of our desires and objectives; for this reason, the reading of the periodic reporting sent by the intermediary must be carefully examined.

Author: Vicki Lezama