It always seems as though someone you know has a friend who got rich off an investment opportunity. Or what about the guy at the office who is always talking about how well his portfolio is doing? When you look at your own investments, it might be tempting to get advice from the people you know to try and boost your returns a bit. Before you believe what your sister-in-law says about the next big thing, though, it’s a good idea to step back and decide whether it’s always a good idea to take investment advice from people you know.
What Do They Know?
First of all, it makes sense to find out what they actually know. Where is the information coming from? Is your friend or relative offering information based on careful study? Does he or she have experience with investing, either as a professional or an advanced amateur? Or is the information coming from a friend, or a “business associate”?
If someone you know is getting their advice from someone else, and then passing it on to you, it’s a good idea to be wary. This is one of the ways investment scams are perpetrated. Your friend may not know that this is a scam, and if you follow along, you could get caught up in it.
Be skeptical if your ordinary acquaintance suddenly claims an “inside track” or if your friend claims to be getting information from some other source. Vet the source of information, and do your own research. It’s rarely a good idea to rely entirely on the claims of a friend or relative.
Will the Advice Really Work in Your Situation?
Another consideration is the fact that finances and investing are very personal. Just because a certain strategy works for someone you know, it doesn’t mean that it will work for you. There are a number of considerations at play. Consider whether or not you have the same long-term and short-term investing and financial goals, as well as whether or not you have a similar risk profile.
The reality is that the strategy that your uncle is using right now during retirement isn’t like to be the strategy you should be using while you are in your working years and in the portfolio building phase. Additionally, your co-worker might have a higher financial risk tolerance than you. If he or she can afford to lose some money, a risky investment might work. But if you can’t afford to lose that money, it makes sense to stay away.
Rather than taking investment advice based on someone else’s financial plan, and what works for them, it’s usually a better idea to visit with a Registered Investment Advisor or a fee-only financial planner who can help you identify a course of action more likely to work for your circumstances. A third-party is usually a better help than someone you know, and whose judgment might be clouded.
Watch Out for Luck and the Market
In some cases, it’s tempting to take advice from someone you know because they have seen some success in the market, or claim to be doing well. Before you get too carried away with someone else’s portfolio, think about the circumstances surrounding the situation. Did the person just get lucky? Or is the portfolio up because the market as a whole is up?
We like to attribute our successes to our own abilities, but the reality is that there are often other forces at play, and the reality is that in many cases, it’s just luck, or the general direction of the market. If you have a good investment strategy, there’s usually not a good reason to change things up, just because someone else claims they are doing really well for the moment. In most cases, a long-term strategy that is based on the overall returns of the market over time is one that is likely to be sufficient. Don’t become so blinded by an acquaintance’s claimed genius that you give up on a solid investment plan.
In general, it’s usually better to trust to your own research, and seek the help of an investment professional if you want advice. Too often, the reality is that people you know are in the same boat as you.