Assessing Financial Advice
You make more money selling advice than following it.
— Steve Forbes
Financial and investment advice seems to be everywhere these days. In fact, a quick search on “Investment Advice” on Google gives you around 915 million results. The biggest problem for many people looking to kickstart their investment journey is differentiating between advice that will set them down the right path and the wrong one.
One of the most instinctive responses when looking for guiding philosophies is to model after a rich and famous person, mirroring what they do. After all, their wealth and fame must be earned through some level of mental and investing prowess. This would be an extremely foolish thing to do and is a quick path to ruin. Billionaires can take on immense amounts of risk because they practically have billions to lose. Losing millions on a punt may be chump change to some of these individuals, but I doubt the average person (and even most well-to-do people) can afford to lose that much.
Additionally, just because a person is wealthy does not mean that they are good investors. Many of them made their money through businesses, inheritance, and even sometimes plain dumb luck. Even billionaires who are professional money managers are prone to making big mistakes which can sometimes bankrupt them. Well known manager Nicholas Maounis who ran Amaranth Advisors, a well known fund in the 2000s attracted over $9Bn in capital after boasting returns of over 80% per annum. However, a large bet in natural gas in 2006 led to the fund losing $5Bn in a week, leading to the fund’s collapse.
Other famous hedge fund managers are not spared from making mistakes either. Bill Ackman, who once ran the world’s top hedge fund had to publicly apologise to investors after his wrong bet on a stock destroyed nearly 1/3 of the assets in his fund. Ray Dalio, known as the “Steve Jobs of investing” and had so much success over the years with his firm Bridgewater, suffered poorly in 2019 and 2020 — two years where markets provided positive returns. Investors are now heading for the exit.
Bloomberg frequently publishes an article titled “Where to invest $10,000 right now”. The list of ideas range from art, to Chinese government bonds, dividend stocks in Japan, and cryptocurrency. Before you run out to throw your money into these ideas, stop and think whether you are approaching this in the right way.
Most investors do not have a lot of cash sitting on the sidelines to chuck at some exciting investment idea. Many are trying to balance their finances, saving a portion of their salary monthly for a long-term goal. Thus it would be wise to engage an advisor on how to build a sustainable strategy. So “where to invest right now”?; the answer to that question for most investors will be to ensure that their emergency fund is set aside, and to create a portfolio mix of diversified stocks and bonds that match their long-term risk and returns expectations. The most exciting part of this journey is the planning process, and perhaps the portfolio rebalancing. Japanese stock picks or bonds denominated in Chinese Yuan should never enter the picture.
If there is any lesson to be learnt from ‘investment gurus’ these days is that it is hard to find an asset class which screams ‘value’. So if the ideas coming from your advisor or banker are getting more exotic and tangential, then you should keep an eye out for the possible risk building up in your portfolio. If your advisor is pushing you to invest in something so obviously ‘good’, you should ask them whether they are also in the same investment. To take reference from Forbes’ quote — advisors and financial institutions often make more money from selling advice than following it themselves.
