As a financial planner, I am all about sharing your financial success.
However, if one more person walks into my office asking to buy stock because his best friend told him the stock is going to increase and he is going to receive a huge dividend payout, I might just scream and slam my office door in his face.
I recently had a client come into my office and hand me a $10,000 check to invest into our precious-metals mutual fund. This client only had a bank account and a credit card with my bank. This was his first investment. When I asked him why he wanted to invest $10,000 in only one mutual fund, he told me that his friend suggested that buying gold was a good investment, so he wanted to invest everything he had.
I had to refuse the transaction because my client obviously didn’t understand the risks involved.
I have to admit that my client is a very trusting person because he was willing to invest his entire life savings based on a hot tip from his friend.
Do you think that his friend will refund the losses when the market crashes? I don’t think so.
But my client is hardly the only person to get bad advice from friends.
Here are three things that you may hear from friends. Their intentions might be good, but please, please don’t take these bits of investment wisdom to heart...
1. 'The market is going to collapse/come back very soon.'
There is absolutely no way to know whether the market is going to crash or recover. If there was, I am sure that Wall Street analysts would have done their best to prevent the market crash of 2008 and the instability that has followed.
Trying to time the market is a very risky and unreasonable investment strategy. The best way to invest in the market and stay invested during market fluctuations is to have a well-balanced portfolio and stay focused on the long term.
2. 'Invest your money in different banks.'
When people tell you not to put all of your eggs in one basket, they are referring to the types of investments that you purchase -- not to the place where your money is invested.
If you are investing in insured deposits, you will have to start investing with a new bank once you have reached the FDIC coverage with your primary institution. However, when you are investing in mutual funds and other securities, it’s actually a good idea to have them all in one place because it’s easier to manage -- one online login, one quarterly statement and one customer-service number to call.
3. 'You are guaranteed to make a profit.'
This one might be the worst of them all. Just like we can’t time the market to know when it is going to gain or lose, we also cannot guarantee a profit on market-based investments. Unless you are buying a fixed-term deposit, your investment profit can never be guaranteed.
If your friend suggests that you buy a stock because it recently increased 20% in one day, keep in mind that it can also decrease the same amount -- or more -- just as fast. Facebook (Nasdaq: FB), anyone?
The Investing Answer: The next time your friend gives you a hot tip about the market, listen to the advice, politely smile and then move on to the next conversation. Your investment portfolio, its investment options and the rates of return are your personal business and no one else’s.
The next time your quarterly investment statement arrives in the mail, look at how your investments performed over the past three months. If you are not happy with the performance and want to take more or less risk with your investments, call your investment advisor to make some changes in your asset allocation.
Before you buy or sell any investments, check out their history and objectives by using Yahoo Finance, Bloomberg, or other financial websites. You can also research the company to see whether it has been in the news.