Get Wise to Your Advisor: How to Reach Your Investment Goals Without Getting Ripped Off

Chapter 7

How to Be Your Own Investment Advisor

Most of us seek expert advice on any subject where we lack expertise. Said differently, most humans are lazy when it comes to matters that don’t interest them, and as a result, they’re often willing to simply rely on the advice of others. Amazingly, this seems to be true even in cases where we know the advice is worthless.

A 2012 study by Asian researchers shows this in all its absurdity. Undergraduate college students in Thailand and Singapore were asked to place bets on the results of coin flips. Coin flips are, of course, completely random, a fact that every adult should understand. To researchers’ surprise, some participants actually paid for third-party predictions about the coin-toss outcomes. What’s more amazing is that, if the predictions turned out to be “correct,” the students were likely to pay even more for more predictions—and to place larger bets on subsequent coin tosses! Humans want to believe they can gain an edge when it comes to making money. This is true in horse racing, gambling in Vegas, and investing.

A recent column in The Economist magazine suggested another reason investors might insist on relying on others for advice. Following someone else’s advice ensures that we’ll have someone other than ourselves to blame if our investments crash.

The truth, however, is that, as much as we might feel compelled to hire an advisor, we may not need to. This is simply because the basic elements of investing successfully ...