• Bob Brooks

Following Advice Based on Dangerous Assumptions

I was watching Fox News and listening as a financial guru answered a question from a listener:

“I am concerned about my son’s college fund. We are four years away from needing the money. We have a large sum of money that we want to go towards his fund. However, I don’t feel comfortable with the stock market. What is your advice?” (Not the exact words –however, the meaning has not been changed)

The expert advised them that as long as they had good strong growth mutual funds with good long-term track records, they should be ok and to go ahead and invest.

Simple answers work great when you have 30 seconds on TV to come up with it. Should that be taken at face value? Some dangerous assumptions are being made with this answer. First, let’s look at the dynamics of human behavior when it comes to this type of question and answer process.

The listener is calling someone for advice. The listener expects to get confirmation of what they believe they already know or additional advice that might cause them to make different choices. The overriding psychology is that the investor wants to be told what to do, be relieved of the decision-making process, and go onto other things.

If you are seeking advice from anyone, that should be looked upon as a starting place and not the final answer. When you are making a big decision, don’t rely on the answer of one individual who has minimal knowledge of your situation. Seek much more information and, most importantly, never make a decision that has not been thoroughly prayed over. It is only through prayer that you can get God’s peace about a decision.

So what is dangerous about that advice? First, there is an assumption being made that the worst is behind us. That may be so. However, if this listener needs this money in 4 years, should they be taking on the maximum risk of everything being put into a growth stock mutual fund?

Second, when a bear market hits (in most cases), long-term track records don’t mean anything. In brutal bear markets, most everything that is traditionally invested gets hurt. Beyond that, what denotes a good growth mutual fund? Surely it is not past performance. Past performance (as the saying goes) does not predict future performance.

Taken at face value, the listener invests and doesn’t worry about it. That is a mighty significant role of the dice for money that is needed in 4 years.

Always ask the question and make sure you answer it before making a decision – what might go wrong with that advice, and how does the potential of that outcome affect my decision?