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Market Wrap-up for May 28 - Don't Settle for Costly Advice

Oftentimes, some of the best money management moves you can make have absolutely nothing to do with buying or selling stocks in your portfolio.

What we’re talking about here is the dozens of things that investors can do to maximize their returns over time that don’t necessarily have anything to do with the stocks they’re buying. If you haven’t already, be sure to read through our valuable guide Free Lunch on Wall Street, which takes a look at 21 different ways investors can make (and keep) more money.

How Not to Fall for Bad Financial Advice

We at came across an insightful article today that ties in perfectly with number 19 on our list of the top 21 tips and tricks: Find a Fee-Only Advisor. The point we made in that list is that many financial experts/planners accept commission based on selling certain products, whether its an insurance policy or a mutual fund. This means that they aren’t always looking out for your best interest since their monetary rewards can cloud their judgement and motivation.

With that piece of advice in mind, seasoned portfolio manager and well-respected financial blogger, Ben Carlson, offers his thoughts on what constitutes bad financial advice. More specifically, he lists a number of warning signs, or rather “red flag phrases”, that can tip you off and save you from following the wrong type of financial advice. Below, we highlight some of the most common, and potentially costly, pieces of advice you are likely to hear from a financial professional:

  • “We ran a series of Monte Carlo simulations and you can see that the t-statistic for the Sharpe Ratio on this portfolio…”: Whenever someone starts to bombard you with numbers, technical terms, and financial buzzwords it’s a telltale sign they are trying to mask something else by attempting to sound knowledgeable. You shouldn’t require fancy simulations and models to understand how your money is being managed.
  • “We got a solid tip on this stock.”: Don’t make an investment decision based on a so-called “hot tip” because more often than not you will end up getting burned. Define your own asset allocation plan, formulate your own stock picking methodology, and stick to that instead of blindly following tips from others.
  • “We hedge out every risk you can think of.”: Don’t fall for the so-called “riskless investment” pitch. Risk comes in many forms and it’s ignorant to think that any one investment can be impervious to going against you.

With regards to the last “red flag phrase”, plain and simple, there’s no way to hedge for every type of risk.

The Bottom Line

There are no shortcuts to successful investing. You can, however, give yourself an edge by avoiding some common pitfalls; this includes knowing what bad financial advice sounds like so that you may avoid it. As with any investment, do your own research before following someone else’s recommendation, even if they are a professional.

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