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How “Selection Risk” Costs You Money and Why You’ve Probably Never Heard of It.

How “Selection Risk” Costs You Money and Why You’ve Probably Never Heard of It.

December 26, 20234 min read

Rita℠ Was Designed to Help You Eliminate This Potentially Very Expensive Cost that Could Reduce Your Investment Savings Substantially.

Of all of the “risk factors” associated with investing, there is one that is seldom discussed – “Selection Risk” / The risk of pickinglosers.Why?  We believe that it’s because there has been no reliable way to effectively minimize, much less eliminate, that risk. After all, there are estimated to be well over 20,000 mutual funds and ETFs, with over 300 track-able performance factors and other characteristics for each.

Without some reliable tool or process, the odds of you being able to identify which ones are best for you are overwhelmingly against you. Take, for example, the large cap “blend” asset class, of which S&P 500 index funds are a part. There are approximately 677 choices and, therefore, the odds of you identifying the best one for you is 1 in 677. In contrast, the odds of you correctly picking a single number in roulette is only 1 in 38, assuming a single and a double zero are included. . . and betting a single number in roulette is generally not considered a “smart bet.”

That could be why so many avoid investing in mutual funds and ETFs.  There are simply too many choices and too much information about them. Fortunately, you can minimize, if not completely eliminate, “Selection Risk” by using Rita℠, the Retail Investment Tracking Application℠. Rita℠ was specifically designed to score and rank all of the choices within each asset class in a manner specific to what you believe to be best for you.

Without Rita℠, how do you, the investor, go about selecting a mutual fund or ETF? What are their drawbacks that Rita℠ can help remedy? The approaches are likely as varied as there are investors, but most likely include these three:

  • I go with the recommendations of my investment advisor.” That’s logical, after all, you’re paying for those recommendations.  But, just how good are they? How good have they proven to be?  Do you know? Do you have any way to tell? If those recommendations are routinely under-performing benchmark indexes, you can be pretty sure there is room for improvement, possibly dramatic improvement. But there’s a much better test than that!  If you want to know just how good (for you) your advisor’s recommendations actually are, simply score and rank them, using Rita℠, and see for yourself.

  • I do a lot of personal reading and research and tend to go with the ‘experts’ that appear most knowledgeable.” We understand. It’s logical to try to become as informed as possible. But more information, especially information that you cannot “vet,” is not necessarily better information. It’s better information that you really need, especially if you can get it quickly and easily and save a huge amount of time in doing so. That’s now possible with Rita℠. You can spend weeks and even months of reading and research and still not get the information that Rita℠ can provide to you in mere moments.

  • I’ve given up on trying to pick ‘winners’ and avoid ‘losers’ by picking index funds.” Many millions of individual investors have also done so, as have some of the largest institutional investors, including government pension funds. But are these index funds the “best” for you? When you use Rita℠ to score and rank them, you’ll likely find out that many, if not most, are actually not “the best” for you . . . that there are others that have, over time, done a better job of producing the investment results you’ve been seeking. Try it and see for yourself.

In the discussion of the first two bullet points, we didn’t touch on another problem – another “risk” that there has been no way for you, the individual investor, and even institutional investors to fully assess much less minimize or eliminate. It’s the risk that the investment “advice” you’ve been following has been corrupted by conflicts of interest. 

If this is affecting the advice you’ve been getting or the opinions you’ve been reading, how would you know? And how much would that be costing you in poorer performance than might have otherwise been possible? The truthful answer is that you don’t know and cannot find out. And this makes the selection processes described in the first two bullet points even more risky.

Fortunately, as will become clear to you when you use it, Rita effectively filters out all conflicts of interest, both known and unknowable.  While you’ll likely never know whether and to what extent conflicts of interest may be affecting the advice you are getting from an investment advisor or the “expert” opinions you may be reading in various publications, that won’t matter if you are using Rita℠. You’ll get to see an objective scoring and ranking of the choices, determined by the factors most important to you and not those most important to any advisor or pundit.

Finally, the most important point is likely this. By helping to minimize, if not eliminate “selection risk” and all of the factors that feed into it - such as too many choices, too much information, conflicts of interest that you cannot identify or eliminate, and more - Rita℠ can help to improve your investment results, perhaps dramatically. 

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Eric S. Smith, J.D.

Eric S. Smith, J.D. is CEO of Decision Technologies Corporation, and President and Investment Advisor Representative of Trustee Empowerment & Protection, Inc., a Registered Investment Advisor

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