Five signs of bad financial advice(Read article summary)
Hamm offers five red flags to watch for when receiving financial advice.
Every once in a while, I’ll find myself in an airport or somewhere else where a personal finance or investment program is on television. I’ll watch it for a bit and usually find myself frustrated because, every time I watch, I see a bunch of red flags that indicate that I should take what’s being said here with a grain of salt and that, if I actually want to utilize any of it, I should do my own extensive research.
Here are the five red flags I see most often with money advice.
Outrageous returns are claimed. People make statements that imply that you’re virtually guaranteed a very quick return that surpasses any legal investment. Whenever I hear an investor saying that a stock sitting at 20 is “going to 45 in the next few months,” I immediately start getting suspicious.
If someone says that they expect some degree of increase in value in a stock, I might believe that person, but over-the-top claims – particularly anything that beats a rate of about 8% annually – immediately set off warning bells for me.
Cherry-picked hindsight is used as “evidence” for their claim. When someone pulls out a specific investment pick that they made a year ago as evidence for how good they are, I immediately begin to doubt them. Sure, they probably did correctly pick that this one investment would double in price, but I’m also willing to bet that they made dozens of picks that didn’t return anything near what they predicted – and they’re choosing not to share that.
I have far more respect for investment counselors who share all of their picks and encourage people to judge them based on their whole track record. I’ll pay far more attention to someone who made 50 investment picks at the start of a year that earned 10% in a year on the whole versus someone who just points out one pick that made a 100% return. That single pick is basically worthless.
They push specific investments to the moon. This screams “conflict of interest” to me, and it’s one of the reasons I’m always wary of anyone pushing me to a specific investment without deeply understanding what I’m looking for and directly relating that to the investments they’re showing me.
Anyone who just says, “Man, this investment is hot and you need to buy in now” is welcome to join my “ignored” list.
The evidence they provide for their tip relies on chart analysis. Whenever someone pulls up a chart of the history of a stock and starts drawing vertical and horizontal lines on it to indicate where it’s going, I tune it out.
I have seen no evidence that “resistance” or “floors” or “ceilings” mean much of anything going forward. It’s easy to find patterns in a lot of old data, but it just doesn’t really pan out going forward.
The evidence they provide for their tip relies on hard-to-verify information. Sometimes, people will point to “rumors” and other weak evidence to buy a particular investment. A new building is going in down the road from this piece of land, or this company is about to launch a pretty cool product.
The problem is that most of this type of information is vapor. You can rarely track down a hard source for it. Sure, sometimes a hard source does actually appear eventually, but just because some claims do come true doesn’t validate investing your money based on unverifiable whispers.
The shocking thing to me is that investment radio, television, magazines, newspapers, and websites all do these things over and over again. If you start digging into investment news, it only takes a few clicks to start seeing these red flags going off everywhere.
For my investments, I stick to safety. I either buy something tangible (like real estate), something with a very long provable history (like a strong blue-chip stock that pays dividends), or an index fund.
That way, I don’t have to pay attention to all of these red flags.