Important Financial Concepts

At Financial Dimensions, education is everything and we help our clients before they invest even a dime with our firm. Whether you choose to work with us or another advisor, we think it’s crucial to understand some basic financial topics before taking the leap into personal investing.

Here are a few of our favorites and their definitions: 

Behavioral Finance

Investing isn’t just about the numbers. Behavioral finance strives to combine cognitive psychological theory (why we act the way we do) with economic principles. By combining these two things and looking at the reasons behind our investing actions, we can understand the common fallacies and hopefully invest smarter and more intentionally.

Passive and Active Investing

Passive investing, or sometimes referred to as buy-and-hold strategy, involves buying investment products, such as securities or mutual funds, with the intention of keeping them for a long time without making changes to the portfolio. In contrast, active investing refers to the  process of continually trying to outperform an investment benchmark index (or “beating the market”) by constantly making changes to an investor’s portfolio.

At our firm, we don’t approach these investing strategies as one or other, but instead leverage both techniques to provide our clients with a competitive, risk-adjusted portfolio tailored to their goals. 

Risk Analysis

Risk analysis, or risk tolerance, is the foundation of a strong financial plan. Knowing how risky, or not risky, you want to be with your investments dictates the decisions we make to pursue your goals. For example, a 30-year-old just starting out in their professional career who is saving for retirement will likely make riskier investments than a 55 or 60 year-old a few years out of retirement.

In addition to investment risk, you will also want to consider your own life risk. Do you have expenses you know you will need the liquid capital to fund? Do you have large goals, such as a child’s college tuition, buying a home, or long-term care for a loved one that you need to consider? Questions like these will help determine your risk tolerance.

Sequence of Returns Risk

Sequence of returns risk is a relatively complicated investing topic, but for your understanding it refers to when the most risk is taken (and the most returns gained) during the investment period. Analyzing sequence of returns risk is just one more way our advisors at Financial Dimensions use various investing techniques to build robust, comprehensive plans.

Whew, that was a lot! We’re happy to chat about any questions you may have.

All investing involves risk including loss of principal. No strategy assures success or protects against loss.