Don’t invest until you understand


You don’t have to look hard to find a celebrity (musician, movie star, athlete) who has been bilked out of a large portion of their earnings through mismanagement. And while some of this mismanagement could be via too much MTV Cribs-style living, other times it was a “trusted advisor” who either used them as a personal piggy bank, or just didn’t know what they were doing.

It’s easy to dismiss these stories with a little bit of schadenfreude, or even just think that that will never happen to you.

Oh really? With misplaced confidence comes misplaced outcomes.

An advisement on advisors

All too often, I hear about bad experiences from people’s financial advisors. Instead of teaching about their options such that they are understood, these people played the “expert card,” going through a bunch of different options a bit too quickly, before saying that they would take care of all of it, asking you to just sign on the dotted line.

Has this happened to you? Have you ever walked out not quite knowing what happened? Are you unsure of what you signed up for?

(This problem is not limited to just financial advisors, of course. Car mechanics and tech support folks can be the same way. Admission: I used to work in tech support.)

If you’ve ever had this feeling, you’re certainly not alone, but at the same time, you should be concerned.

Wait until you understand

I firmly believe that you shouldn’t invest in anything until you understand it fully.

When I say “fully,” I’m not saying that you can spout quotes from the prospectus or anything like that. But in general, you need to know:

  • What you’re invested in
  • What the strategy is (and why)
  • Fees associated with this strategy
  • Potential risks (and probability)
  • Potential rewards (and probability)

That might sound like a lot to keep track of, and you may not have any interest in it. “But I just want someone to take care of it for me!”

Unfortunately, you don’t get that pass. Because nothing less than your very livelihood is at stake here. This is your money, your future, your ability to travel the world and spend time on your hobbies and visit your family. You want to entrust that to someone else? Maybe I’m not trusting enough, but I rather think you might be too trusting.

Why you can’t outsource this

Here are some reasons why you can’t outsource your decisions, even to an “expert”:

  • The expert may not be an expert. Just because someone has letters after their name, or wears a suit, doesn’t mean that they are qualified or successful. Being an expert requires having a proven track record. And this comes from testimonials from informed people, people who have been well served by this person. Think about it: You look at five Yelp reviews to figure out where to go to dinner, but you only get a single review from a friend for financial advising? Bad plan.
  • The expert may take advantage of you. Remember all those celebrities with advisors who mismanaged their client’s funds? I don’t mean to spread hysteria or libel, but how do you know unless you are confident about what you’re getting into?
  •  The expert may not be trustworthy. How is this expert making his/her money? Are they getting kickbacks from certain investments that you make? Can you trust them to have your interests in mind? I’m not suggesting that advisors shouldn’t make a decent, even exceptional living, but when they provide advice that specifically benefits them, the lack of objectivity calls everything they say into question.

A test

So here’s a test you can take before you can truly say that you’re ready to move forward with an investment. Can you explain the plan to a family member or trusted friend? I’m not talking about giving away specific numbers (I’m well aware of the taboo on talking about specific figures) but just the fundamentals. Here’s a sample (hypothetical) situation:

“I make too much money to contribute in the Roth IRA plan, so what we are going to do is invest in funds in a traditional IRA and then perform a ‘back door’ conversion to a Roth each year. I’ll have a big tax bill each time because of this, but this means that the money in the Roth will grow tax free from here on out…”


“The first fund I am investing in is an aggressive small-cap mutual fund from Flagship, with a low fee of 0.20% and no load. It has returned approximately 11% average annually over the past 20 years…”

I think investing is best when it’s simple, as complexity is often used to obscure financial shenanigans. Don’t buy into it. If you don’t understand, speak up. If you’re not getting the answers you need to explain it to someone else, keep trying. If the information still isn’t forthcoming, stand up, say thank you very much, and walk right out the door.

But enough about me. Can you explain your investing strategy to someone else?

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