Myth #3 My Advisor Knows Which Stocks to Buy
Financial Myth’s Blog Series
Unfortunately, much of the information relating to money that permeates our thinking as individuals and as a society is based on myths. This misleading information has no factual basis and can actually prevent us from achieving our financial objectives. This week we’re dealing with the misconception that your advisor knows which stocks to buy.
Follow along with us through the Financial Myths Blog Series. You may be surprised by what you discover about yourself and your financial plan!
Myth #3 – My Advisor Knows Which Stocks to Buy
If your advisor knew which stock to buy, they would be a billionaire living on an exotic island – not running an office in your local city! A few issues that affect picking individual stocks are as follows.
1. Emotions
2. Lack of Information
3. Hidden Company Problems
4. Unexpected Competitor Advancements
Emotions
We assume a company’s value based on our emotional attachment (or detachment). People are biased about the companies they are close to and the countries where they live. Obviously, these biases do not necessarily represent the highest performers and could be disastrous to an investment strategy.
Lack of Information
Regardless of how much you presume to know about a company – there are many hidden factors. For example, what are they discussing behind closed doors? What are they not telling you? Companies release what they want you to know, not what you need to know to make an informed decision. Even experts across the globe with extensive networks, computers, and research cannot predict which company will thrive. If they could, they would be billionaires relaxing on the before-mentioned island.
Hidden Company Problems
If companies are going through a dry or unsuccessful period, they don’t call you up and advertise it. Instead, they emphasize how great they will be next month and all the potential in store. Because, that’s just what companies do.
Unexpected Competitor Advancements
In six months, Kodak went from a blue-chip company to almost non-existence. All because they missed a small technological advancement. Notwithstanding how well you know a company, do you know what their competition is doing?
So, With these four issues in mind, how are we supposed to invest successfully?
First and foremost, we should do so academically and base our decisions on facts instead of emotions. So, the next time someone enthralls you with fantastic stock advice, place the probability of success on your side, and use fact-based portfolios to keep you systematic, unemotional, and diversified.
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