Financial Advice you should be wary of

Free financial advice comes from all corners whether you are starting out or well established. In personal money matters, people look to their families, relatives, etc for casual advice. Informal financial advice is also often dispensed during casual conversations between friends, work colleagues, etc. The advice is sought out of trust or relying upon other’s investing experiences. While the advice given is innocuous, it can be dangerous in harming your finances over the long run. Here are the types of financial advice you should ignore which usually come from near and dear ones:

Advice that sounds too good to be true: You should be wary of putting your money in speculative schemes which promise the moon. It could be akin to a ponzi scheme where investors are fraudulently targeted and promised unrealistic returns. The fundamental question as to how and in what way the scheme will make money is usually forgotten to be addressed. In most of the cases the information is limited and it’s hard to know what you are getting into. There have been many instances of work from home, marketing survey and lottery scams which have occurred online in India. So, if you have the slightest doubt, trust your instinct and avoid putting money in a venture you do not fully understand even if your relatives or peers swear by it.

Advice that promises instant returns: It is natural to get lured by hot stock tips which promise instant returns. These are usually advocated by stock market experts across new channels or offered by friends work colleagues etc. However, it is prudent to avoid such stock market noise. The rush to make a fast buck can cloud your judgement. If a friend/colleague got lucky in making instant money does not mean he will be successful the next time too. No one can get lucky every time. It is important to understand that there is no crystal ball to predict what will happen in the markets tomorrow, a month later or after 10 years. A successful investor is the one who is focused on the future and understands that it takes patience and time to create long term wealth.

Advice to borrow money for stock investment: While people get into debt for various purposes like buying a house, car, etc., or for setting up a business, borrowing money to invest in shares is a different ball game. The risk is too high as equites are a volatile asset. Margin trading is a common form of leverage in stock trading. Traders having a high-risk appetite to bear losses, often resort to margin trading to do share arbitrage and derivative deals. The stock broker offers a margin which is a loan in your account. When the going is good in a bull market, the gains can be fantastic. But during a downturn not only do you bear heavy losses on your own invested money but also on the broker’s money which you need to repay along with heavy interest. So, it is important to understand the downside if your stock broker or trader friend recommend such a deal.

Advice to invest for saving tax: Financial advice on all sorts of tax saving investments is easy to come by from friends, colleagues, agents etc, especially in the March quarter of a financial year. The end result is that in a bid to save tax, your money gets locked for the long term and in products unsuitable to your financial goals and risk-taking capacity. Avoid such advice which only gives you a myopic view of just saving tax and ignores your financial profile in totality.

Advice that suggest not taking enough risks: Our personal finance beliefs to an extent are shaped by the environment in which we are brought up. While no doubt your family would always wish the best for you, their financial advice may not always necessarily be in your best interest. Stemming out of love and concern, your family doling out money advice could be too conservative and totally in contrast to your individual situation and risk-taking capacity. For e.g. mixing insurance with investment, buying too much of physical gold and fixed deposits but not having enough exposure to growth assets like equites etc. You need to realise that your risk-taking capacity can actually be higher compared to what your parents perceive risk to be. While you should value their inputs, eventually the financial decisions you take should be in sync with your risk appetite and financial goals.

Advice that is biased: Many of us are tempted by the success stories of friends and relatives to jump on the bandwagon, only to be disappointed later. It is natural to get attracted to financial advice which has actually worked for a dear one and the results are there for you to see. For e.g. a friend invested in a parcel of land and made good money after selling it. As he had a good experience in his land deal, his advice about real estate would be obviously biased when he is recommending to you. But you need to understand that his success story may not replicate and work out for you. This has nothing to with whether you invested in a bad or good product. It all ultimately depends upon your liquidity and overall financial situation.

You are a unique person which has a unique financial profile including your goals, investment horizon and risk appetite. While your near and dear ones may be wishing the best for you, take their financial advice with a pinch of salt. Your personal financial decisions should be guided by solid rationale keeping in mind your financial situation and not by herd behaviour. You should not blindly follow casual advice and ask the right and honest questions about your own personal state of affairs and suitability.



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