When it comes to money, it seems like everyone has his or her own best interest at heart. All you have to do is look at a couple of high profile cases like the Bernie Madoff and Allen Stanford scandals, two different hedge fund managers accused of running billion dollar ponzi schemes, to be aware of the risks involved when trusting others with your money. You should be guarded when taking the financial advice of others, whether they are professional investment advisers, the office day trader, or a well-meaning family member.
However, not all brokers, investment advisers, and hedge fund managers are out to get your money. There are thousands of honorable investment advisers who will do their best to make your money grow. After all, their success is often tied to yours. As with all investments, you should always do your own research before committing your hard earned dollars. Here are a few examples of when it pays to research before acting.
Don’t rely on insider tips to make investment decisions. The first thing to be aware of is that insider trading is illegal. Before acting on any investment tip that someone claims to be insider information, ask yourself if it is really insider information, and if it is legal to take action. If the information is publicly available anywhere, you don’t have any advantages over the general population. There are hundreds of thousands of investors who have access to the same information you do. Always research the fundamentals before pulling the trigger on any trades.
Be aware of scams and agendas. Where is the information coming from? If it is from an unsolicited e-mail, then delete it immediately, mark it as spam, and move on with your life. Pump and dump scams, penny stocks schemes, and similar scams are common and should be avoided at all costs. Also aim to find out the advice giver's agenda. Is the person trying to sell you an investment? Do you already have a business relationship with him or her? Is he or she trying to give you an upsell or generate new business? Before investing, find out as much information as you can about the investment, the individual, and any potential conflicts of interest they may have. It may surprise you to learn that brokers do not have a fiduciary duty to you, and they may recommend investments that give them a larger commission. This is why it is essential to interview your investment adviser before hiring him or her.
Be cautious of advice from the office day trader. Every office (and family) has one or two well-meaning individuals who love to share their enthusiasm for investing. You can often identify them as someone who always has hot investment tips, brags about how much money they made on their latest trade, or talks about losses they avoided on a recent market downturn. While the office day trader means well, it’s impossible for someone else to know how well or how bad they are actually doing, since it’s easy to only talk about the wins and avoid talking about the losses. My general rule of thumb is to avoid making any investment decisions based on the advice of acquaintances or family members. I always do my own research first. It’s better for friendships, and better for your portfolio.
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Remember, there are no guarantees. No matter where you get your investment advice, there are no guarantees. That is why it is imperative that you do your own research before acting on the investment advice of others. At a minimum, you should make sure you understand the risks involved with any potential investment, and make sure the investment fits in with your risk tolerance and investment goals.