Be Aware of Your Own Limitations

This applies to your previous education and experience, time, interest and motivation. New things are always coming onto the market, so the time and commitment are ongoing. If you are not really interested in financial matters or even have a phobia about them, don’t push yourself too hard, and get someone else to do it. Be honest with yourself about all the above factors.

Accordingly, if you have other people managing your money, ensure that you meet with them regularly and have enough time to communicate meaningfully and bilaterally with them. Personal meetings are far better than phone calls, which in turn are better than emails. Even sophisticated investors need good and productive relationships at the human/money interface. Indeed, if done right, this is a good reason not to go overboard with internet investment.

Delegate all appropriate activities to the right people. Somewhat ironically, one of the most important elements of investment sophistication is to know what you don’t know, and to be able and willing to find out who does know and who is on your side. Even the most sophisticated people do not know about everything. Even within one area, such as bonds, there are experts who know far more about one type than another. Furthermore each company, each asset and each market has its own experts. Thus, part of being sophisticated is tracking down experts with the right skills and letting them guide you.

Avoid Misuse of the Term “Investor Sophistication”

Do not let your sophistication be used against you. The crux of Goldman Sachs' defense was based on the fact that the investors were sophisticated, and therefore could make a reasonable decision based on the information provided, which in effect means that the investors had limited or even no legal rights. To protect yourself down the line, when you buy products, ensure that the nature of the investment, how it works, and your objectives and risk profile are all clearly documented in writing.

It is also often worth pointing out to the seller, in writing, what you are relying on them to do such and ensure a balanced portfolio, monitor the markets and keep you fully informed of changes. You can also do this in greater detail, depending on the investment. Then, if things go wrong, they cannot claim that as a “sophisticated investor”, you knew everything and should have done part of their job yourself.

Investor sophistication is a rather vague and rubbery concept, but one thing is clear. Liability for mismanagement cannot be evaded legitimately by shifting the blame onto an investor simply on this basis. Make sure up front that you are well protected against this notorious seller defense.

Conclusions

There is a lot of misunderstanding about who really is a sophisticated investor, what this implies in terms of skills or active management and how to benefit from the associated skills. True sophistication entails a mixture of knowledge, understanding, experience and, equally important, delegation to specific experts.

Furthermore, the world of money is ever-evolving and revolving, so your knowledge needs to be updated constantly, and this also applies to the people you deal with. That is, they have to keep up with the trends too, and if not, you need to replace them. In summary, the trick of real sophistication is to manage your overall investment process optimally, rather than trying to know and do it all on your own.

1. Give definitions to the following terms.

financial advice –

financial theory –

investing strategy –

investor relations –

2. What are the steps of becoming a sophisticated investor?

3. Who and what is to manage the overall investment process optimally?

Дата добавления: 2015-10-30