AS investors, we seek to make the best investment decisions with the intention of maximising our returns. However, the reality is that with so much information and so many investment options available, it can be difficult for an individual to sort through this information to make an investment decision. As a result, many seek investment advice from people they trust.
Some people opt to use sources such as blogs, chat rooms, the Internet, family and friends for information when making investment decisions. An advantage to using these methods is that there are no associated fees. However, the credibility, relevance and timeliness of the information may be unknown.
Acting on information that is not relevant and current can make for a poor investment decision, and the investor could stand to lose big.
HOW TO EVALUATE THE INVESTMENT ADVICE YOU GET FROM YOUR FRIENDS AND FAMILY?
When you receive financial information from these sources, it is important to ask the right questions to determine if the recommendations are suitable for you.
What investments do you have and how have they performed overall?
People giving financial advice based on their experience tend to tell you to invest in what has made them money. However, they may neglect to tell you where they have lost money and the reasons for the loss. Ask them about their winners and their losers. Understanding that all investments have some element of risk is important. Know the underlying risks and determine if the investment meets your risk appetite before proceeding.
WHAT IS THE SOURCE OF THE RECOMMENDATION?
Often, friends and family will make recommendations based on their past experiences. They may have purchased a stock that has appreciated greatly in value or they may avoid an industry or stock that has lost them money. They may not take into consideration that the stock could now be overvalued because of the price movement – which has now put them into a gain position. Their recommendation would be based on the thought that the price will continue to appreciate or depreciate incessantly without looking at the fundamentals of the company.
WHERE IS THE DATA TO SUPPORT THE RECOMMENDATION?
Ask the friend of family member if they can pass on the research information they received. This will help you determine the credibility and validity of the information being provided.
Your investment decisions should be based on your specific circumstances. Be sure to consider your individual goals, risk appetite and tolerance as well as your investment time horizon when evaluating investment advice, no matter the source of the advice. While it is okay to seek investment advice from friends, family members or the Internet, it is always best to speak with a licensed financial advisor who can provide the relevant and current research to help guide you in making your final decision.
Dwayne Neil, MBA, is the AVP, personal financial planning at Sterling Asset Management. Sterling provides financial advice and instruments in US dollars and other hard currencies to the corporate, individual, and institutional investor.
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