Beware of accountants offering harmful investment advice

I had a contact this morning from a long-time blog reader, who is in her 70’s and was recently advised by her accountant, that she could “make a lot more income in stocks” than her current ladder of guaranteed deposit certificates at the bank.  This, oh so helpful, accountant then provided her client with the names of two investment sales reps that she recommended the woman consult for financial ‘advice’.

Unfortunately, these type of overly-confident, harmful suggestions are handed out by clueless accountants every day. (The same crowd tells people not to sell stocks that have gone up in value a lot in order to avoid triggering tax- Nortel anyone?) Perhaps most mean well; perhaps some are collecting referral fees. But the net effect of such ignorant, risk-blind recommendations regularly does harm to trusting souls who act on them.

Contrary to mainstream cliches, risk is only likely to be longer-term rewarding when assets are selling at significant discounts (not all-time highs!), and even then, unbiased rules and care in allocation and product selection in light of an individual’s risk-tolerance and needs are paramount.

An investor-beware warning list from UK asset manager Tim Price yesterday, offers a very valuable antidote to the dumb, marketing mantras that so routinely pass as financial advice today.  This list should be printed out, posted on your bulletin board, and passed around to those you care about:

1. For many investors, capital preservation in real terms should be more important than capital growth in notional ones.

2. Investors – as humans – are typically loss-averse. We feel the emotional impact of equivalent gains and losses disproportionately. This does not mean we should avoid considered risks, but to invest dispassionately.

3. Investing dispassionately is difficult when most of the investment media comprise the participants in a 24/7 circus. If the business of investing is either entertaining or exciting, you’re doing it wrong.

4. The answer is obvious: turn off CNBC. (Judging by their viewing figures, plenty of investors already have.)

5. True diversification remains the last free lunch in finance.

6. Having fatally tainted monetary policy, the dismal science of economics has wrought damage across investment theory as well: ‘homo economicus’ does not actually exist, and markets will never be wholly efficient until all people are, too.

7. “The investor’s chief problem – and even his worst enemy – is likely to be himself.” (Benjamin Graham)

8. The general principles of investing are not arcane. They should begin with the avoidance of loss.

9. Starting valuation is the most important characteristic of any investment.

10. Risk is poorly defined as volatility. It is better defined as the possibility of a permanent loss of capital….

See:  “I’ve been investing since January, and I’ve never seen anything like it”, for the entire excellent 21 point list.

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