You may have heard this simple tip for investing: buy stocks in products that are familiar to you. After all, if you use and know these products, a lot of other people must do the same. Besides, isn’t it better to put your money into things you know?
In “The Perils of Investing in What you Know,” finance expert Carl Richards looks back at some of the sources of this advice and explains why investing is more complicated that keeping an ear put for sound bites from business and investment icons.
Richards goes back to renowned investment manager Peter Lynch. Lynch who quoted as saying you should be able to explain an investment idea with a crayon drawing and there is a well-known anecdote of Lynch buying a stock because he wife liked the company’s product. The stock appreciated a great deal. This, plus that fact that Lynch expertly managed his company funds to great profit means that people when he speaks, people listen.
Advice from Lynch and other investment icons like Warren Buffet gets taken out of context and according to Richards, people fail to realize that one piece of isolated advice is not an investment strategy. For example, deciding to buy a stock because his wife loved the product doesn’t mean that Lynch didn’t do research. It’s possible that his friends and family loved other products but Lynch didn’t invest in them because research showed they wouldn’t be profitable.
While you can certainly invest in stocks on your own, one of the functions of a Fee-Only financial planner is to guide you with investment advice. Investment strategy is just one of many services you can expect from a Fee-Only financial planner. Whether you are a novice or knowledgeable, simplifying and streamlining your investment strategy will lower expenses, protect against market volatility, and balance risk with return.