Recently, I read an interesting article about giving advice in investments to others. It started me thinking, and I decided to make it the subject of this column. When we give advice, we run the risk of being considered an "expert," even though we're not being paid for our service.
Let's assume the person you're giving your advice to is your 80-year-old grandfather who lives on a fixed income. Chances are he won't be around to ride out a "huge" decline in the value of his savings. Would you want to be the person responsible for him losing most or all of his retirement by telling him to invest in the latest "hot tech"stocks? I don't think so.
I can hear some of you say, "this is such basic information - why waste space talking about it?" I think it is important enough to "waste space" on it. Aside from that, many do not realize that they could be sued for giving "false"information. Law suits are so common these days, whether they are for legitimate reasons or not. Even if the suit is dismissed, there are many court costs involved which you might incur.
Sometimes our relatives or friends will ask for some tips since they know we are "into the market." Often, they are inexperienced and they are counting on us to help them make a lot of "quick money"without taking time to select their own stock choices. What do we do? This can be an awkward situation. I have made it a rule not to give advice - I only share my own experiences - if you like what you hear, then "go for it". I also say, that it is so important to "do your own homework", as you are ultimately responsible for your own investing decisions. There is a lot of the "blame game" going on lately - but in reality, we can only blame ourselves for having listened to others and acted on their "advice".
Why is it risky to give others advice? First of all, each of us has different needs and goals. There are so many things to consider before investing or responding to other's requests - we need to answer some questions. These might include:
* Is the money for retirement (which is long term)? * Is it for child's college expenses (which can be long or short term, depending on the child's age)? * Is it for a down payment on a dream house (which could be short term)? * Is it to supplement current income? * Is it just or the fun of it.
Then after we ask the questions, we need to find the correct vehicle for the investment. If it is short term, and just a supplement to income, a CD or quality bond fund might be in order. If the person has a long-term horizon, say thirty years, the stock selection could be much more speculative. Over the long haul, stocks have always rewarded more than any other investment. So you see, there are so many things to consider.
Then there is the individual's risk tolerance - usually women are more conservative than men. They are more apt to buy consumer stocks with names that are familiar to them, such as Procter & Gamble (PG), Johnson & Johnson (JNJ), PepsiCo (PEP), Home Depot (HD) or Sara Lee (SLE). Men usually like to take more risk, often buying "exciting" high P/E tech stocks, such as Juniper Networks (JNPR) or JDS Uniphase (JDSU).
Still others are "worry warts". If this is the case, we wouldn't want them to invest in volatile tech stocks. The large blue chip quality stocks, such as ExxonMobil (XOM), Duke Energy (DUK), Walgreen Drugs (WAG) or Abbott Labs (ABT) would be better for them. These stocks move up and down with the market, but not to the degree of tech stocks, and they pay a dividend which can be reinvested.
I notice so often on message boards that individuals are "tooting" their own stocks, many are penny stocks that are only listed on the over-the-counter Bulletin Board (OTCBB). These small stocks, often under $1.00, are very risky. There is little information available as they are not required to have annual reports or meetings. Often, one large "buy" or "sell" order will move the price up or down violently. If you look back in a few years, most of these stocks have just disappeared. Yet, we see many speculating in them, hoping to own another Microsoft. It is OK to mention your own stock choices, but you need to give your reasons why you like or dislike them. Others then have a chance to check them out themselves and thus choose whether the stocks are right for them and their particular goals.
If, after reading this, you still want to give your advice, you probably should lean toward suggesting conservative funds. Consider funds that will offer a taste of stock market volatility - and potential gains - without subjecting the novice investor to risks. (A good overall fund for the long term is Vanguard Total Stock Market - a no-load fund that represents the entire market)
Whatever you do, don't take on complete responsibility for someone else's investment portfolio unless you are qualified to do so. Investors who will be putting "large" amounts of money to work probably need professional guidance. However, today with all the information available on the internet and the numerous financial journals and magazines, many are able to make these decisions for themselves. One major consideration - be sure you know your sources.