So, you’ve been working with a financial professional and you’re on your way to achieving your investment goals with a tailored plan. But wait! You just heard about a hot stock tip from a friend at lunch and now the seed of doubt has been planted. What if you’re missing out on some big returns?
It’s common for us to discuss some of our investment ideas with our nearest and dearest. One 2018 study reported that three out of four people ages 28 to 39, and half of those 40 to 52, talk finance with friends. A 2014 Yale study found that both social learning, (finding out that your friend is planning to buy an asset), and social utility, (keeping up with the Joneses’), significantly influence financial decision-making. Almost 93% of study participants who were told that a peer was planning a particular asset purchase bought the same for themselves.
“The people I work with see how their friends are living and they have conversations about bitcoin and cannabis stocks and they succumb. Often these things can be at the peak of the bubble when the majority of people on the retail side tend to get involved,” says Naheed Gilani, a certified financial planner with Conscious Wealth in Calgary, Alberta.
Although a hot stock tip or news of higher returns elsewhere may make you envious or uncertain of your own strategy, says Monique Madan, lead financial life strategist at Upotential in Toronto, there are a host of reasons why someone else’s portfolio may theoretically be doing better than yours at a certain point in time. More context is needed in order to make an accurate comparison, she says, and to know whether the return being touted is realistic, or whether that particular investment is appropriate for you.
“I was counseling a client recently who called me to say, ‘I’m not getting 5%; my brother-in-law is getting 5%.’ However, the brother-in-law could have a much higher risk tolerance than my client, and perhaps he hasn’t mentioned the times he may have lost 20 or 30%. Or he may even be exaggerating.”
When faced with investment tips from friends or family, Madan says, it’s key to know your limits and values and work within them. She also recommends having regular contact with a financial professional who isn’t tied to selling products. The advisor should be able to provide recommendations based on what’s best for the client, as well as an affirmation that they’re “on the right track.”
Gilani adds: “When Uncle Bob gives you a stock tip or suggestion at dinner, his wealth situation and plans for the future are very different from yours. So, don’t take advice from people who have a different vision and experience level from yourself.”
Investment goals can also be affected by family in other ways. For example, a couple may have an open financial relationship, but there’s a difference between giving your partner access to financial information versus giving them full reign to do transactions which may or may not be a good fit with your risk tolerance.
“I think online access to accounts has worsened this because it allows you to trade more frequently for cheaper. It’s also easier to gain passwords and access a spouse’s accounts and trade on their behalf, whether or not you have trading authority or power of attorney,” says Gilani.
While keeping separate access codes is crucial, especially if you have different investment objectives, Gilani adds that another key to keeping plans on track is to have financial conversations early in the relationship.
“Have the conversations so you can set some boundaries and know what each person is building towards,” he says.