3 reasons why you should be careful about investment advice from friends and family
Be wary of basing your investment decisions purely on advice offered by friends and family – even if they have good intentions.
This is the view of Lettie Mzwinila, business development manager at Allan Gray.
Studies have shown that loved ones can have a strong influence on investment decisions. This is because money is a personal matter.
“When it comes to our hard-earned cash, we tend to value advice from people who we believe always have our best interests at heart,” says Mzwinila.
“However, while our social circles may mean well, taking investment advice from someone who is not qualified to offer it could lead you down the wrong path and to potentially bad outcomes.”
According to Mzwinila, your decision to invest should be based on your circumstances; your appetite for and tolerance of risk; your objectives; and your investment horizon.
Investment horizon refers to the length of time you expect to hold the investment.
“Your social circle may suggest an investment based solely on potential returns, without considering your needs, and this could impact your investment success,” says Mzwinila.
A good story doesn’t equal good value
Furthermore, just because the news about an investment is good doesn’t mean that it’s a good investment – or that it’s the right time to invest.
“This is because, when the short-term outlook of a company is good, the market tends to extrapolate this into the earnings outlook of the company rather than assessing its long-term earnings potential,” explains Mzwinila.
“The same goes for bad news: Investors often operate under the assumption that if the news is bad, so is the investment. This is not always true. When market sentiment is negative, you could be looking at an excellent investment opportunity.”
According to Mzwinila, investment advice from one’s social circles is often based on the short-term performance of a particular investment or headline news.
“Investing is a marathon, not a sprint. To give yourself a better chance of success, take a long-term view rather than continually chasing the short-term winner that everyone at the braai was talking about,” says Mzwinila.