I have written about this topic in the past and it is a constant sore subject for me. Meeting many financial professionals is humorous because of their quickness to discuss how “financially minded” they are and all the “hot stocks” they are kicking ass on. When I ask the simple question of “Why did you invest in that?” it can tell a lot about whether the person is an investor or a speculator.
You, as an “average” person, can easily find out which financial advisor is right for you by asking the simple question of “why?” If the answer sounds like b.s., it probably is. If they can’t explain, in normal terms, why an investment is worth it, it probably isn’t. I am reminded of Enron and how the CEO and President couldn’t explain how they made money, and looking back, THAT is how everyone should have known it was a fraud.
The same way a CEO should be able to explain how they make money, your financial advisor should be able to easily explain why you are in a specific fund or stock. If they can’t, run for the hills. After all, you can easily beat the stock market over time by just buying dividend paying stocks in the S&P. It has been proven time and time again that just buying the dividend paying stocks in the S&P will beat the S&P handily over time (2%+ per year). Why pay fees to someone who can’t explain basic fundamentals of investing to you when you can just invest on your own and beat the market?
Don’t be afraid to question. When I get asked questions, it makes me happy that someone is basically asking me to prove I know what I’m talking about…everyone who has knowledge wants to show off their knowledge. If they don’t have knowledge, they will get defensive and not be able to show you. That will also be how you know they are a speculator vs an investor. A speculator is someone who doesn’t have a basis for making decisions and they are basically just throwing darts at a board. Can they be right at times? Of course! During any bull market, like the one we are in now, anyone can look brilliant. But those who follow the trends will lose when the trends fall out of favor, which happens when markets turn and it gets ugly. Don’t follow that person. It can be hard, though, when the herd is your buddy at work or your neighbor bragging about their 35% gains last year.
Oh, and the stock market is still vastly overpriced. Still waiting for my 40-50% bear market. In case anyone forgot. And if you asked me why I think that, I would have many logical answers. Because I’m not afraid to have the answers.