Sep 30

The importance of a second opinion in investing

By MultiplyWealth's Team

12.09.30.jpgA second opinion. It’s often sought for medical advice, but not very often when it comes to investing decisions.

That’s unfortunate. You are doing yourself a disservice by getting all of your investment guidance from a single adviser, says Tom Brakke, CFA in his latest Inside Investing for the CFA Institute.

How many advisers should you have? The answer depends on your situation, but one is too few. You should at least get periodic second opinions from someone else (and not someone who is just out to grab your business).

We all have strengths and weaknesses—and brilliant moments and blind spots. Your adviser does too. Understanding what your adviser’s strengths and weaknesses are will give you the best chance of navigating the confusing world of investment advice.

Even the best minds in the investing world have very different theories and approaches. Value investors including Warren Buffett believe in buying great companies when they fall to cheap prices. Great market technicians -- John Murphy among them -- attempt to exploit market inefficiencies by studying chart patterns and the stock market’s relationship to bonds and other asset classes. Richard Driehaus is considered the father of momentum investing, which involves buying stocks at high prices and waiting for them to go even higher.

Of course, you’ll also find experts who specialize in dividend stocks, strategies that seek out investments with less volatility than the market overall, long-short strategies... you get the idea.

Which is the right one for you?

That depends partly on your life circumstances and risk tolerance, of course. But it’s also fair to say that each may be right at different points in a given economic or market cycle.

It’s one reason why I think that market participants should think differently about the idea of diversification. It many not simply be a matter of buying a little bit of everything so that you have all of the style boxes checked. To me, there is a benefit to using a mix of diverse stock strategies -- ones that are not correlated strongly with each other. It may require incorporating alternative investments, bonds, real estate and commodities.

Getting true diversification is the goal. Making that happen nowadays may require a mix of ideas and opinions from different individuals and firms -- especially from ones that can help you move away from traditional strategies that tend to move in lockstep with each other.

 

If you want to talk about how potential market events or the fiscal cliff might affect your equity portfolio, and perhaps talk about whether some of our defensive-minded investment strategies might be right for you, write Multiplywealth at notice@multiplywealth.org It’s your own account; you can see the balance change on a daily basis, make investment changes extremely quickly, and add to or pull your money at your complete discretion.

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