The Motley Fool

Why You Should Not Trust Friends for Investment Recommendations

Humans are naturally social creatures, and our brains would usually seek attention and crave social interactions without us even realising. Even in the realm of investing, we continuously look out for investment ideas from others as well as seek validation for our own.

However, when it comes to sourcing for investment ideas, hearing from friends is not always the best method to use. Unless one is able to find a friend or peer who shares a similar philosophy and process with himself, it is usually better to do your own research rather than rely too much on others. Here are three key reasons why friends’ investment recommendations may not be trustworthy.

Different investment philosophies

Different investors may have radically different investment philosophies, and this is the reason why some investors may not even agree on what constitutes a “good” investment. To give an example, some investors may look to invest in government-linked corporations for safety and security, while others may gravitate towards smaller companies for better growth prospects. Yet others may choose to only purchase blue-chip companies which have a long track record and dividend payment history.

As there is always a good potential for clashes when two investors share different philosophies, this is one key reason why some friends may not provide pertinent investment advice.

Different personal goals and objectives

Everyone has different personal goals and objectives in life, and their investment philosophy would internalise these goals and lead each investor to seek different targets and achievements. One investor may focus more on dividend flow in order to supplement his income, while others may be building wealth slowly and steadily over time by adding his capital into investments. A third may be more aggressive and invest almost exclusively in higher-risk technology and pharmaceutical firms which do not pay a dividend.

The above examples illustrate how each person may behave as their motivations in life are vastly different. Approaching a friend for an investment recommendation when they have different investment goals is an exercise in futility.

Different time horizons

Finally, each investor has his personal time horizon for an investment to bear fruit. It is pointless for a value investor to ask a short-term speculator for a stock recommendation when both have totally different ideas of what “long-term” means. The value investor has the patience and discipline to wait for an investment to mature and bear fruit, and is willing to wait for years. On the other hand, the speculator may seek quick gains and have a time horizon of just days or weeks. Friends with differing time horizons would not be able to agree on the types of investments they should look at.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice.