Theoretical advice doesn’t take into account how people actually operate and decide when it comes to money matters.
Sometime back, we discussed the real cost of ‘free’ financial advice. You would agree that we Indians are somehow genetically wired to love everything that’s free. So, when it comes to financial advice, too, availing it free is the way to go for most people.
But if you read the earlier article, you will come to realise that such free advice comes at an enormous cost. More importantly, this realisation comes when it’s already too late.
After the free versus paid debate, there comes another aspect of advice that people fail to understand. That is, real good advice versus advice that only ‘sounds’ good.
Utility of the advice
Unlike the one that only sounds good, the real good advice is likely to be effective. That is, it will be capable of bringing about a change. More importantly, it will go a long way in convincing the person being advised to take action. Advice which doesn’t push (and kind of inspire) the person being advised to take action, is useless.
Take a small example from real life.
Suppose your younger brother is a big-time foodie. And as a result, he has put on a lot of extra weight which now threatens to derail his health.
No prizes for guessing what good advice you would give here: Cut down on unnecessary eating and begin some regular exercises.
That is typical advice that sounds good. No one can question it.
The problem is that your brother too is aware of this but still chooses to ignore. And therein lies the problem.
People know what the right thing to do is and still act differently. That’s how we humans operate.
As investment advisors, we face similar situations.
Think of it: what is the ideal way to invest? You would say ‘buy low sell high.’ What else could be the right way?
Now, look at it from the perspective of advice.
Just telling the clients to ‘buy low sell high’ is an example of advice that only sounds good. Everyone knows it.
Focusing on goals
But a person giving real good advice would already know that it’s really difficult to buy low sell high every time. The more practical advice here would be to first focus on goals and then when you begin your goal-based investing, make sure you periodically re-balance the portfolio so that the exposure to the asset which has moved up is cut and that to the one which has moved down is increased.
If someone implements this simple advice, it will be far more effective (and useful in real life) than just trying to constantly buy low and sell high.
Theoretical advice doesn’t take into account how people actually operate and decide when it comes to money matters. It ignores the power of fear and greed in people’s decision-making process. What people say that they would do in a falling market is different from what they actually do when the market begins to fall.
And this doesn’t end here. If you read financial media these days, many are full of advice that sounds good and predictions in sophisticated language—both aren’t very helpful in real life.
But let’s be frank. The ability to differentiate between the two types of advice doesn’t come overnight. It takes time to differentiate noise from the real signal. But you have develop the ability gradually. After all, it is your money and it is your responsibility to get yourself the right advice to manage it.
For starters, remember that for financial advice to be effective and actually good, it doesn’t have to sound good or be very complicated. But it should also give you a proper path to tread on and not just talk about the end state. Read that again. It is important. And a really good investment advisor will always keep you and the goals at the centre and give you effective advice. He or she will focus on the right advice first and not the products alone. This is a key differentiator between a good advisor and a poor one.(The writer is the founder of StableInvestor.com)