Depending solely on other people for your investment decisions can mean dying a slow death.
Over the last few decades, the switch from employer-managed pension plans to self-managed retirement accounts (i.e., IRAs and 401k’s) has turned each person into his or her own pension fund manager.
Financial advisors often compare this switch to a scenario in which a person is given a room full of medical equipment, a few medical reference guides and websites, and told that she’ll now be in charge of providing her own medical care for the rest of her life.
The natural conclusion to the analogy is that we need professional help. We need doctors. We need financial advisors. And that’s likely true.
But it doesn’t let us off the hook for educating ourselves.
Making Our Own Decisions
Everyday, we make several health-related decisions for which we don’t have the luxury of consulting a doctor. I don’t call my doctor every time I prepare a meal. You probably don’t either. It’s up to you to have a basic understanding of:
- which foods are healthy (and which are unhealthy),
- how much (and which types of) healthy food you need each day, and
- how much junk food you can get away with.
And that’s just your diet. Yes, it’s important to have a doctor, but there’s still a whole list of things you need to know about how your body works and what you can do to take care of it.
Same thing goes for your finances.
Unless you plan on consulting your financial advisor every time you spend money, donate money, or make any sort of investment decision, it’s important that you have a basic set of financial skills. For example,
- You need to know how to track your spending to ensure that it stays below your income.
- You need to know the difference between a stock, a bond, and a CD. And you need to know what each one is used for.
- You need to know how to decide whether to prepay your mortgage or invest for retirement.
Further, it’s important to recognize that advice can’t be trusted solely because it came from somebody who calls him/herself a financial advisor. After all, some financial advisors are better than others:
- Some advisors give honest, unbiased, sound financial advice, while others are crooks.
- Others, while good people, are subject to conflicts of interest that make it impossible to give unbiased advice.
- And still others–although unbiased and ethical–are simply incompetent.
It’s essential that you have some background knowledge yourself, otherwise you’ll have no ability with which to choose between advisors. (Side note: Asking for referrals doesn’t cut it. Unless your friends and relatives are quite financially savvy, they can receive poor advice for years without ever knowing it.)
- E*Trade IRA - Official Site