Investment Pitfalls – Taking Friends’ Advice

Written by: Scott Sery

One of the biggest investment pitfalls is taking some bad advice from a friend.  Whether the advice is on a great mutual fund they just found, or a hot stock that is “sure to explode,” the friend is just trying to pass on knowledge that they have recently learned.  All too often though the end result is that the friendship is damaged, and both parties end up losing money.

Nearly everyone has the friend that feels that since they have been investing for a few months now, they are experts.  They may be the first in the group to start setting money aside, or they may be a more adventurous investor.  However it comes about, they want everyone to copy exactly what they have done for two reasons.  They want to make sure everyone praises them when (if) they get rich quick, and they want to make sure they are not the only ones that lose out if something goes wrong.  So when they find a great mutual fund, low cost insurance, or a hot stock, they share it with friends.  The smartest thing the friend can do is to do plenty of research before jumping in.

It is too easy for a friend to suggest a specific mutual fund, hot stock or even an insurance policy without knowing the details of your specific financial situation.  While most of us will invest in mutual funds, not all mutual funds are right for all people.  Some mutual fund companies charges fees that are too high, and subsequently the investor loses out on some of the return they should be seeing, or they charge too l of fees and the fund underperforms.  A hot stock could explode, but more than likely it will flounder along, and too often it fails completely expiring worthless.  Insurance companies that are in financial trouble will offer teaser rates, but after the initial period is up (usually 6 months or 1 year), the rates skyrocket leaving the buyer to go out shopping once again.

Personally I have experienced these pitfalls myself, and been the culprit.  I found a great stock that was sure to explode and convinced a friend to invest.  Neither of us got a penny back on our investment.  I visited an insurance broker (someone in the industry who is supposed to be honest), who convinced me to go with the cheapest insurance company.  A year later when I received policy renewal notice my rates had gone up more than 20%.

To avoid these pitfalls it is imperative that the investor their own research before they put their money in a company.  Look at the fees associated with the mutual fund, look at the performance history, research the company issuing the stock, and find out if the insurance company has a good financial strength record, or history of raising rates.  Chasing hot stocks usually ends in losing money, so stick with well-diversified, low-fee mutual funds that track the market.  While not as exciting, it is the safer way to go. You may even decide to find a trusted advisor who is regarded in the community as being honest and putting their clients’ needs first.


Investment Pitfalls – Taking Friends’ Advice

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