These days, it seems as though almost everyone has an idea of how you can get ahead as an investor. However, no matter how good the investment advice sounds, you need to do a gut-check. Can you trust this person? And why is he or she sharing such a great tip with you?
While you can listen to the investment ideas put forth by just about anyone, it’s another thing to whole-heartedly trust someone else with your money. Before you take the plunge, carefully examine the situation and the fundamentals, and then reconsider. Here are 5 people you should be wary of when they are giving you investment advice:
It’s tempting to get in on that “hot” tip that your brother-in-law is offering, or get in on the bottom floor on that “investment opportunity” your cousin is involved with. Unfortunately, too often, your family members don’t really understand investing. Like many others, they are following the herd, and that “hot” stock may be in bubble mode.
Even worse is the possibility that your family member has been taken in by an investment scam. Going in can mean that you are caught in the trap, too. Before taking the advice of a family member, review his or her track record with finances, as well as remind yourself that your family member probably doesn’t have know-how or credentials to be giving investing tips.
Why would a stranger go out of the way to give you great investment advice? In this category are those emails you receive about penny stocks and other “opportunities.” Also, be wary of taking advice from strangers you meet in social settings. He or she might be bragging about his or her investing prowess, but you don’t really have any proof that there is real performance capability there.
Unless you work in the investment industry, and your co-workers are all analyzing the merits of a particular investment, your co-workers probably aren’t the best people to turn to for financial advice. Instead, your co-workers are likely just behind the curve, buying when everyone else is, and selling in panic when things go south.
On top of that, co-workers are often sources of investment scams. They get taken in by scams, and then ask you to participate. They may be in earnest about the “opportunity”, but that doesn’t make you feel better after you’ve both been duped.
4. Media Talking Heads
It may be fun to watch Jim Cramer’s antics, but it’s important not to take your advice from media talking heads. Financial media doesn’t exist to inform investors. The primary goal of financial media is to make money; any education or useful information provided to investors is merely a side product.
One of the best ways to make money is to sensationalize things. Media talking heads try to draw you in by convincing you that something is practically full-proof, or by whipping up fear about imminent disaster. Making investing decisions based on these extremes presented by the media can lead to big losses to your portfolio.
Take the news with a grain of salt. Instead, you are better off following your own investing plan designed for the long haul, and ignoring the noise from the TV screen.
5. Brokers and Other Wall Street Types
Going to a stock broker for advice seems like a slam dunk. After all, these folks know all about investing. Unfortunately, Wall Street types probably don’t have your best financial interests at heart. Brokers are, on a basic level, salespeople. This means that they are trying to get you to buy products that will earn them a better commission.
Whether it’s someone at your local bank, or a broker with an official firm, the reality is that these advice-givers only have to recommend something that is “suitable.” And suitable isn’t the same things as “best”.
If you want solid advice from a professional, consider using a Registered Investment Advisor (RIA) or a fee-based financial planner. The RIA has a fiduciary responsibility under the law to look to your interests ahead of commission, and a good financial planner that isn’t paid by commissions can offer mostly unbiased advice. Here are a few tips to find a dependable financial advisor.