Michael on August 13th, 2007
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You: What should I invest in?

No financial advisor worth the time you invest in a free meeting could possibly answer that question without first getting to know you and your financial situation intimately.

You: Intimately?

The financial advisor/client relationship is a close one.

You: Okay, then say “close.” The idea of having an intimate relationship with anyone who likes investing that much kind of creeps me out.

I can see that angle, but the point remains that a successful advisor/client relationship is a close relationship. As such, you should always be very skeptical of anyone who can quickly tell you what you should be investing in. As you know, I have a name for such people.

You: Yes you do.

I call such advisors “Gary.” Remember, Gary isn’t concerned with the appropriateness of a recommendation from your perspective. Gary’s the kind of guy looking out for his best interests.

You: So where does that leave me?

Assuming you’ll be investing on your own (we’ll talk about identifying an appropriate financial advisor in a later post), the key–after you’ve determined your risk tolerance–is to keep your head on straight and your expenses low.

You: In other words?

Don’t swing for the fences. Establish an appropriate asset allocation based on your ability and willingness to tolerate risk and then purchase low-cost index funds.

Gary: Boring!

You know, I won’t argue that one, Gary. But responsibly growing people’s life savings is a good place to be boring.

You: Really?

Most people simply need their investments to grow steadily over many years. Trust me, those ending balances won’t be boring. And some weeks (like last week) the ride won’t be boring either. If you want crazy fluctuations of up 20% down 25%, go to your nearest casino. Play (because gambling is playing, not investing) with money you can afford to lose.

You: A little more info on mutual funds, please?

Sure. Mutual funds can own stocks, bonds, and even cash, all of which create value for the shareholder. Since mutual funds own many different investments, mutual fund shareholders benefit from diversification, which lowers the overall risk. In addition, mutual funds are run by people who dedicate their careers to managing investments–they’re experts. You can benefit from professional investment management.

You: I can?

Sure, but as with any other occupation, some mutual fund managers are lousy. But–and here’s where mutual funds have a leg up on the people who forecast the weather–it’s pretty easy to see how the manager has performed. If you do some basic research, you can pick a mutual fund manager who has done a good job for a while. Of course, you still have to monitor her annual performance, because anyone can be lucky for a while or become complacent.

You: It feels good to receive an unbiased financial planning education.

Thanks – tell a friend. Let me tell you – it feels even better to give an education.

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