Conflict of Advise

We generally do not like being told what to do, especially in areas where we believe we know better than most other guys and definitely know better than the Charlie with the attitude who thinks he can advise me on how I can invest better.

In my own extended family, most of those I know pretty closely have done way better than many mostly thanks to investing in their own house at a pretty early stage of their career even though at those times, I am sure none had a clue that the investment would yield such enormous returns (Potential since most still live in the same house anyways).

But if you are active on Twitter for instance, you would have heard about how stupid it is to invest in real estate with such low rental yields. Sophisticated guys would then plot American Real Estate prices to show how prices there are (adjusted for Inflation) at Zero returns after 100 years.

Just now, I was hearing to a financial advisor saying that Goals are important than beating some Index. Feels right, isn’t it? But how logical that statement really is, is the bigger question and one that is tougher to answer.

Most advisors advise against investing in fixed deposits showcasing historical data that shows how equities have given higher returns vs. debt. While that overlooks the fact that, equities provide a higher return since you are taking a higher risk, we still come down to measuring returns against another instrument to justify investing in one asset class over the other.

Websites that offer you some kind of planning (Retirement / Child’s Education among other normal major goals) offer a matrix where you invest X, you assume you will get Y% and if done for Z amount of time, you are well and truly home.

The assumption used to calculate is based on historical growth rates which may or may not replicate. It’s one thing to have faith that our goals will be achieved if we save and invest and yet another thing to assume that between now and 10 / 20 / 30 years later, we shall still be able to do the same things we are doing right now.

When designing trading systems, one key area to focus is “path dependence” of the system which enables it to finally reach its final number. Traders who believe the path of the past will repeat similarly in future as well generally get sorely disappointed and are most likely to drop the system even though its behavior is well within limits of what could have happened in the past.

Any financial advisor who promises to you that your goals will be fulfilled is fooling with you since none knows how the future will unfold. At best, all of us can make educated guesses about probability of one being able to achieve our goals which generally start off from a low base and as time goes by and we continue to march forward on our journey gets higher and higher till we see it being accomplished.

“Life is a journey, not a destination”, so said Ralph Waldo Emerson.  While long term goals are important, not knowing how the future will unfold, its way better to have much shorter term goals that are easier to accomplish and at the same time make life more enjoyable.

Each one’s opinion (including mine) is not just based on how we see the world but also the experiences one has had (especially negative ones). Add to that complexity of the fact that advisors look out for their own interest as well (after all, nothing much comes for Free, Right?)

A lot of things are honestly outside our control, so all you can do is control the things that remain in your control (Income and Expenses). Rest is left to market forces and Luck.

Further Reading: The high cost of high expected returns