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To hire a financial advisor or not: that is the question

June 13, 2012

The stock market fell this past week after an unemployment report was released, which stated the unemployment rate rose to 8.2%. Subsequently the stock market fell; by the end of the week, the market had given up all the increases in prices it had gained earlier in the year. This continued market gyration could have you spooked about investing in the market.

I recently read the book “The Investment Answer” by Daniel Goldie and Gordon Murray, which helped me gain a new perspective on the market. Murray, who worked on Wall Street more than 25 years, had developed brain cancer and wanted to share what he learned with the general population while he had time.

Should you hire this guy to help you out?

Murray and financial advisor Daniel Goldie came up with five questions that everyone should ask themselves. Based on these questions, individuals can have a solid investment plan. I’ll look at a few of these during the next couple of weeks.

The first decision Murray and Goldie believe you need to make is if you should invest on your own or hire a financial advisor. Murray and Goldie believe just as you wouldn’t try to give yourself medical advice if you’re not a doctor, or mechanical work if you aren’t a mechanic, you shouldn’t try to do it all yourself with your investments.

This probably is not a surprise since both of these individuals have been involved as financial advisors. With that, it would be easy to discount this suggestion, but the major reasons they give on why you shouldn’t do it yourself may surprise you.

You should not have an advisor help you try to find the next great investment that is going to beat the stock market. Also, you should not enlist the services of an advisor who is a family member or friend. The major reason you need a financial advisor is to protect you from yourself.

One of the major problems individuals have with investing for the future is their own behaviors. In the past 20 years, the stock market has averaged an annual return of 8.2% compared to the average investor who has only earned 3.1%. We should be trying to buy and hold for a long time, but our emotional state gets in the way of us making wise decisions in a variety of ways.

The first is overconfidence. If in the past we picked a great stock or mutual fund that soundly beat the market, we believe we can do it again. The problem is over time, a very tiny fraction of individuals can beat the general market over the long term.

Second is the human instinct to be attracted to rising prices with a herd mentality. We see that if a stock or mutual fund has gone up a great deal in the past couple of years, it must be a solid investment that will continue to increase very rapidly. The problem is, most people buy in after the investment has seen most of its gains and individuals who get in too late end up buying high and selling low.

One of the best examples of this was the dot-com market crash more than a decade ago. It was easy to see every web company have a stock price that continued to skyrocket. Many individuals believed you could buy any dot-com, no matter how much it had gone up in the past, and still ride the company to great results. However, when it was finally realized that many of these companies would never make any money, many people lost most of their retirement as stocks that were priced more than $400 a share went to zilch.

A third human instinct that gets us in trouble is the fear of regret. If you spend time watching the market, you’ll notice it goes up and down. There are some days it goes up quite a bit and some days, such as last Friday when the unemployment report came out, that it goes down quite a bit. There are many who are afraid of losing their money on the down days so they never make the decision to invest. They keep their money in very safe accounts that are federally insured. True, they don’t lose any money, but with inflation, the money they are saving actually ends up having less purchasing power when the individuals are ready to use it.

You don’t need to hire a financial advisor to give you the next great secret investment. It isn’t out there. You do need to hire a financial advisor who is willing to teach you, explain tax implications of your investments, and help you make wise logical decisions so you don’t get carried away with your emotions.

Find the right person who has the education, experience and integrity to guide you in making wise decisions about your future. Be careful of what you pay. An advisor should be able to make a living by helping you out, but the fees you pay shouldn’t severely hurt your results.

When you find the right person for the right price, you’ll have the right person in your corner to calm you down with the wild market gyrations and help you enjoy the longterm 10% annual increases that the stock market has had in the past.

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4 Comments leave one →
  1. June 15, 2012 4:35 am

    It’s easy to find a financial advisor. But is not that easy in choosing the right one. I remember a quote from Darren Brandman of Knightsbridge Advisors saying “Your financial advisor will be your eyes when you can’t see and your legs when you can’t walk in the investment industry. This person must work with integrity by working for your best interest. “

  2. June 15, 2012 7:02 am

    Everything to help,
    Thanks for following. Everyone and their dog now claims to be a financial advisor even though most of them are just in sales. Any other tips you have to pass along?
    Thanks,
    Andy

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