Giving financial advice to family if you cannot keep quiet

Posted By on April 14, 2011

For those of us who can relate to being asked for investment advice by family … I’m sharing letter I received today that might help.

For some delusional reason, a few in my family feed my ego by asking for investment advice, even though my competence is questionable. I usually keep quiet on the subject since over the long haul an index fund or for that matter a dart board may have been better. As the author says, “there’s no upside to giving financial advice to family … [and] … unless someone in my family is about to make a huge financial blunder, I’ll steer the conversation over to something less polarizing – like politics or religion.”

Below is part of the advice that reads like it was written by a politician – but might keep someone from being disowned by their family.

… We all know asset prices have been ramping higher. It’s a direct result of the Fed’s quantitative easing programs. What stands out from this list, however, is there aren’t any bargains left in the financial markets.

Everything’s expensive.

Stocks are expensive. Bonds are expensive. Gold, silver, and other precious metals are expensive. Oil, corn, wheat, and other commodities… you guessed it… expensive. Foreign currencies… expensive.

The only thing that’s cheap is the only thing nobody wants to hang onto anymore: cash. You don’t make money in the financial markets by selling off cheap assets to buy expensive ones. In fact, that’s a sure-fire way to lose money. So, sensing my sister-in-law was about to make a financial blunder, I broke my own rule and offered her the following financial advice.

Dear Sis,

You can probably put your money into any combination of these investments and do just fine if you leave it alone for the next 20 years. Asset prices tend to go up over the long term. So any choice now, combined with patience, is likely to do better than the zero percent interest you’re currently earning.

But I know you won’t leave it alone. You’ll look at your retirement account statements next month and next quarter. You’ll be pleased if the balance has gone up. You’ll be disappointed if the value falls. And if the value falls a lot, you’ll panic. You’ll want to sell out and go back to the 100% cash position you hold today.

I know this because you’re human. You have emotions. You use phrases like "have to do something," "stuck in cash," and "must buy something." Every investment choice on your list has gone up a lot. That’s why you feel like you "must buy something." You’re missing out and you want to get in on the action. That’s normal. Successful investing involves buying assets when they’re cheap and selling them when they become expensive. It seems to me that using your cash to buy any of the funds on your list would be doing the exact opposite of what is successful.

My advice is to wait until the end of next quarter, or maybe the quarter after that. Take a look at the performance of your investment choices. If you find yourself saying, "Thank goodness I didn’t buy that fund" or "I’m so happy I’ve been sitting in cash," that’ll be the time to start putting some of your money to work.

Looking forward to seeing you at Christmas.

Comments

Desultory - des-uhl-tawr-ee, -tohr-ee

  1. lacking in consistency, constancy, or visible order, disconnected; fitful: desultory conversation.
  2. digressing from or unconnected with the main subject; random: a desultory remark.