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At the risk of stating the painfully obvious, most people go to financial planners for good advice on what to do with their money. You expect that an expert in finance could tell you the best actions to take, especially when you’re a newbie yourself and need guidance to get started with what feels like the hard-to-understand world of investing.
But that wasn’t my first experience with a financial advisor. The worst investing advice I ever got actually came from a financial professional I reached out to when I knew I wanted to start growing my assets, but felt overwhelmed by how to do it.
I was 21, and when I asked this advisor what I could do to put my money to work and achieve my goals, the only answer I got back was, “Just max out your Roth IRA every year. That’s really all you need to worry about until you’re in your 50s. At that point, we’ll need to do more planning.”
As someone who went from clueless 20-something to professional in the financial industry herself, let me tell you right now: That is very bad advice. Here’s why.
Investing is important, but you can’t do it without context
When you invest, you need to understand a few key things about yourself first.
One is to have a sense of why you’re looking to invest in the first place. If you don’t understand why you’re investing, or the purpose of the money that you want to put into an investment, it is very difficult to understand if that investment is appropriate for you or not.
Knowing the purpose will also help you define things like your time horizon, or how long you are willing to leave the money in place without accessing the funds.
As part of that, you also need to understand both your risk tolerance and your capacity to take risks. Broadly speaking, your risk tolerance is how well you can handle risk from an emotional perspective.
If you are extremely risk averse, you probably need to stick with more conservative investments. If you feel more comfortable with risk, perhaps something more aggressive where you face a greater chance of loss is OK.
But you also need to understand your risk capacity. It doesn’t matter if you feel comfortable with the idea of incurring a massive loss as long as there is a chance of hitting a home run. If you literally can’t afford to realize that loss, then you can’t take the risk.
Finally, you need to understand how an investment fits into the larger picture of your overall financial life. This is why it’s important to engage in some financial planning first, and then determine what kind of investment strategy makes the most sense given your current situation, your needs and challenges, and everything you want to accomplish with your money in both the short- and long-term.
This is the biggest reason why the advice to contribute to a single account and do nothing else was very bad. There was no context. That advisor did not know anything about me, my life, or my goals — and clearly wasn’t interested in learning.
Getting terrible investing advice at an early age inspired me to help others navigate their money
Don’t get me wrong: Maxing out a Roth IRA is a great step to take. But it is far from the only action to consider to help you reach your goals.
At the time, the idea that I would simply max out a Roth IRA for my entire working career and “don’t worry” about doing additional planning until I was into my 50s — 30 years down the line! — seemed a little sketchy at best. Now, with more experience, it sounds downright criminal.
Because that advice didn’t feel anywhere close to sufficient, I decided to dig in and try to learn more on my own, and that set me on a path of learning about investing through DIY forums like Bogelheads, dabbling in the FIRE movement, and eventually changing my entire career path to work in financial planning.
As part of my research, I learned not all financial pros are created equal. It was important to me to work in the section of the industry that prioritized clients’ best interests and focused on giving advice rather than selling products.
(Pro tip: If you want to hire someone for financial advice, look for a fee-only, fiduciary-100%-of-the-time, certified financial planner who prioritizes financial planning first!)
After getting such bad advice for someone who held themselves out to be a financial expert, I felt passionate about helping other people with their money in a way that I had not been supported.
I’ve been able to do so, and improve my own financial life along the way. I did end up maxing out that Roth IRA, but I also opened a taxable brokerage account, worked to increase my income, and pushed my savings rate to 30% or more of my income on a consistent basis.
In a way, my bad first experience with someone giving me professional financial advice was also the best thing that could have happened to me. It inspired me to learn and be proactive with my money.
Not only am I more educated and knowledgeable today than I otherwise would have been if I never had that bad advice given to me, but I also get to help other people find their financial power, too.