Today's Hot Tip can be Tomorrow's Cold Comfort

By David McEwen

Sunday 28th January 2001

Being an investment adviser is a bit like being a doctor. As soon as people find out what you do, they start asking for free advice about their personal situations.

Rather than being asked about sore backs or errant moles, I tend to get interrogated about what shares to buy or whether it's time to go overweight on bonds. I used to give answers freely until I realised that people might take my opinions on a subject as a firm recommendation to take action.

Recommending an investment has to be considered in light of a person's objectives, risk tolerance, time horizons and so on. A volatile technology share might suit a 20-something go getter, but not a retired widow, for example.

The reason people are so keen to sound out advisers, friends and colleagues when making investments is that they are trying to reduce their risk.

The trouble is, such an approach can add risk. Like 'sure bets' on the gee-gees, some recommendations are often based on no more than wishful thinking or rumour.

According to Errol F Moody, a professor in financial planning and investment at the University of California, relying blindly on the recommendations of others can often lead to trouble.

"Anyone getting a referral thinks everyone else has done a lot of homework where in fact no one really has," he says.

He adds that there is only one way to evaluate an investment properly. "It's called research, research, research. If you can't do that, you are one bad investor."

He's blunt, but he's also right. No matter how experienced an adviser is, or how well connected the next door neighbour's cousin's sister is, it is important to remember that the end responsibility for your money lies with you.

Good advisers can be useful because they take away the donkeywork, possibly two parts of the "research" standard recommended by Mr Moody. However, not all advisers or tip-proffering acquaintances are equal and should be chosen with equal or greater care than any investment.

The Western Australian Ministry of Fair Trading says investors should avoid the following:

Inflated promises. If high rates of return are promised, ask for evidence of how this will be achieved and what risks are involved
A recommendation to put all your money into a single investment
An unbalanced or poorly diversified investment plan
A recommendation not to keeping cash in reserve for unforeseen circumstances
High withdrawal costs to exit an investment
Advice that focuses on tax benefits more than returns
No prospectus. If an adviser recommends an investment has no offer document or prospectus, this could be a warning sign that it is illegal, risky or both
Being advised to 'just sign here'. Make sure you read all the documents carefully before making the decision to sign
A reluctance to answer questions

People often lose their senses when it comes to money. The chance of making a quick profit is so alluring that some take ridiculous risks to achieve it. This tendency often works to the benefit of fraudsters and opportunists. It pays to have a cool head when making decisions that affect your wealth.

David McEwen is an investment adviser and author of weekly share market newsletter McEwen's Investment Report. He is commissioned by the New Zealand Stock Exchange to write an independent personal investment column. He can be reached by email at davidm@mcewen.co.nz.

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