Making informed decisions around investing can, at times, be very difficult. When the market is volatile, we all wonder what we should do, and it is natural to turn to others for advice and assurance. But who do you turn to, and are they the right person to consult?
As many readers know, I am active in the world of academia. I teach finance, investments, and economic courses to students and retirees. One time I was proctoring an exam and noticed one of the students cheating. When I approached the student about it, his response was simple: “I needed to pass the test, and I wanted to see if we got the same answer.” Even though both could have the same answer and still be wrong, he wanted confirmation.
I sometimes reflect on that story because, in the world of investments, people want confirmation that they are doing the right thing – or that they are not doing the wrong thing (which is usually the more significant issue). People are concerned that they made a bad investment and will lose money. Or maybe their portfolio will not hold up during times of market turmoil. It may be that they will not reach their retirement goal. Regardless of the reason, many investors want to look at somebody else’s paper – they want assurance that they are investing wisely.
One of the most common advisors an investor turns to is a trusted family member or close friend, someone they know who has been active in the market, has a good knowledge of investing, or has done well managing their portfolio. The investor feels that this confidant will be upfront and honest about what the investor should do.
Sometimes the investor may turn to research and financial analyst sources, such as online blogs, websites, or analytical new services. Many of these are very commendable and highly respected. The contributors and commentators have been in the industry for a while and have extensive experience, education, and certifications that give them credibility. Many have graduate degrees, titles, and designations such as CFA or CFP, in addition to other qualifications. These are easy to find – SeekingAlpha and RagingBull are two typical venues, while Investor’s Business Daily, Motley Fool, and Stansberry Research are others that provide insights from experienced traders.
Some investors turn to chat rooms, social media posts, or social news aggregation services that provide discussion with other investors via the web. This avenue takes many forms, but it often consists of retail investors, many of whom are well versed and knowledgeable about investing, but others have little to no background. These venues’ contributors provide opinions about a particular stock or investment but usually without any fundamental analysis – it’s pure conjecture and opinion.
Other confirmation methods are advertisements and marketing promotions that tout a company’s stock. The ad doesn’t promote the company or its product; the ad is advocating the stock. The message is often something to the effect of “Get in now while you still can” or “It’s a billion-dollar untapped market opportunity.” Of course, if the company were so great, why would they need to push its stock? Wouldn’t the market do that? But people see the ad as confirmation, and the marketers know that.
Probably the confidant an investor turns to the most is a financial planner. Since these advisors are licensed and have resources at their beck and call, investors feel they can revert to them for unbiased, assenting advice on what investments to make and how to design a portfolio.
These are but a few ways investors look to get confirmation on their investments or their strategy. And to be sure, many of these sources are trustworthy and have proven themselves. However, it is like the student looking at the other person’s paper – just because they have an answer you want to hear, it doesn’t mean it’s right.
For one, the advice may have been right in the past, but there is no guarantee it will be right in the future. It may be, but it may not. While evident, what happened yesterday may not apply today – market conditions change, and some stocks lose their steam.
Additionally, it may not be suitable for you and your situation. Your risk tolerance, investment horizon, and other constraints may make the investment inappropriate for you. The stock may be too volatile, the price has already run its course, or it isn’t an appropriate investment for your portfolio.
Half of your sources will often say a stock is the most undervalued opportunity and recommend you buy it now, while the other half will say it is a dog and sell immediately. Additionally, your consultant could have ulterior motives. Financial planners sell investments; there may not be a conflict of interest, but they don’t make money telling you to keep your assets on the sidelines.
So, what’s the answer? My first recommendation is to take advice with a grain of salt. My second piece of advice is to do your research. Understand what the company does, how it makes money, and why it will excel in the future – and be able to articulate it on a fourth-grade level. You don’t need extensive financial modeling skills, just a basic understanding of why it makes sense that you can explain easily.
If you have skepticism but are intrigued by the opportunity, one parting word of advice is to invest a tiny portion of your assets. You can make a pilot trade with just a few shares and then go from there depending on how the investment behaves. You don’t have to go all in.
We all want confirmation that we are doing the right thing, but it is hard to get that with investing; there are too many variables to consider. However, through education and training, you will know how to research the fundamentals to make informed decisions confidently.