Should You Take Investment Advice from People You Know?

Should You Take Investment Advice from People You Know?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.

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How to Start Dividend Investing When You Have Little Cash

How to Start Dividend Investing When You Have Little CashIf you want to build long-term wealth, investing is one of the best options. To really super-charge your efforts, though, dividend investing can be a great option. With dividend investing, you have the chance to reinvest what you receive in payouts, essentially getting more shares for free. On top of that, later on, your dividends have the potential to become a significant source of income for you.

Dividend investing now can help you build your portfolio faster, and then when you are ready to retire, you can use dividends as income. Not only that, but dividends often receive favored tax status. As of this writing, in both the Canada and the United States, dividend investing comes with tax breaks. Any time you can see tax breaks for your investments, it’s a chance for you to grow your wealth even more efficiently.

But, even if you know that there are benefits to dividend investing, how can you take advantage of these opportunities? Many people think that they need a lot of money to make dividend investing work for them. After all, if a company is paying out 25 cents a share, you aren’t going to see a sizable payout unless you have the capital to buy a large amount of shares.

The good news is that it doesn’t have to be that way. Dividend investing can be done, even if you don’t have a lot of money. Thanks to dollar cost averaging and dividend reinvestment plans, it’s possible for you to start investing now, no matter how much (or how little) money you have.

Start With a Dividend Index Fund

When you have a small amount of cash, you aren’t likely to be able to buy a lot of shares of solid dividend stocks. This is where indexing can help you. Investing in an index fund gives you instant diversity, there are usually low costs, and you can take advantage of a general trend for the market as a whole to rise over time, in spite of short-term losses due to volatility.

A dividend index fund is one that follows a variety of dividend paying investments. You can choose from high-yield funds, aristocrat funds, or funds filled with dividend stocks from different countries. Most online discount brokerages offer access to dividend index funds. Not only that, but you can usually buy fractional shares if you set up an automatic investment plan.

The ability to buy a portion of a share of a dividend fund is very helpful to the beginning dividend investor of limited means. You can set up a plan that deducts $100 from your account each month and uses to purchase as many shares as possible at the current market price. So, if a share of the dividend investment fund costs $75, your $100 can buy you 1.25 shares. The next month, your $100 buys however many shares it can, and you keep growing your portfolio.

Dividend index fund shares, purchased using an automatic investment plan, is one of the best ways to start dividend investing when you don’t have money.

Automatically Reinvest Your Dividends

A dividend index fund will result in regular payouts of dividends to your account. One of the best things you can do is give your discount broker’s automatic investment plan the ability to automatically reinvest your dividends. Whatever dividends you receive will go toward buying more fractional shares of your fund.

As you continue to use dollar cost averaging to buy shares, and as your automatic reinvestment adds more shares over time, your dividend payouts will get bigger. And, as your payouts get bigger, you will be able to buy more shares with your dividend reinvestment. You can see how the cycle feeds on itself and continues to grow your portfolio.

Over time, as your income increases, you can put more money toward buying dividend investments. You can sell some of your fund shares to purchase individual equities, or diversify into REITs. As you progress, it’s possible to change up your strategy, slowing continuing to build your portfolio and your nest egg.

The most important thing is that you start as early as you can so that you have time on your side. With the accessibility of investments, and with the different options you have now, it’s easier than ever to start investing in dividends, even if you don’t have a lot of money.

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