Delegating investment decisions to industry advisers largely on naive faith and hope without adequate personal knowledge, attention, and control can be very risky to your personal and family welfare. The only practical solution is for you to increase your personal investment knowledge and skills.
Individuals must decide for themselves whether a particular financial or investment concept is fact or fiction, personally useful or not. Individual investors face formidable challenges to their ultimate success. Many investors have very inadequate financial planning and investing knowledge and skills, which makes self-direction problematic. Unfortunately, much information from the industry is shallow and inappropriate. This information may seem plausible, because the financial services industry writes it to sound reasonable to individuals. Some of it is reasonable and some is not.
For example, when many hundreds of highly diversified mutual funds and ETFs are available at extremely low costs, there is no good reason for individuals to do so much buying and selling of individual securities. Yet, millions frantically buy and sell equity securities in hopeful efforts to beat the market. They are egged on by the financial media and the brokerage industry, and most waste huge amounts of valuable personal time in these pursuits. Most will fail miserably in their efforts and suffer substantially increased risks, costs, and taxes in the process. Yet the vast majority will never bother to check their net performance against passive benchmarks and will never really know how badly they have done. (See: What is the cost to individual investors of sub-optimal portfolio diversification?)
Individuals can do a better job of distinguishing financial planning and investing fact from fiction. They can choose to base decisions on financial strategies and tactics that have been validated scientifically. Individuals must become better informed. Otherwise, naively, they must rely upon the supposed goodwill of others. In the very costly environment of personal finance and investing, depending upon the goodwill of others can be a very risky strategy.
Significant danger exists in not understanding certain fundamental truths about the financial services industry itself. The structure of the financial services industry creates conflicts between the financial interests of individual investors versus the profit motives of the industry and the self-interest of its employees and sales agents. These motives can be a much greater threat to investor welfare than the potential for outright fraud that rightly concerns so many investors.
There is not free investment money for individual investors to find lying around. Interactions with the financial markets are a “zero-sum game” before costs and taxes, and they are a "negative sum game" after them. In the short-term the size of the securities market pie is fixed, and when one party gets more, another gets less. In and of themselves the markets do not create value, but the industry can siphon away a significant portion of investors’ potential returns through visible fees and hidden costs. (See: Excessive investment costs are a huge problem for individual investors)
Of course, the capital markets provide an extremely valuable economic contribution to our world through the efficient allocation of capital. However, this role does not necessarily mean that investment profits will be shared equitably between individual investors and the industry. Investors and the industry are in competition with each other over how to split this pie. Investors who understand this conflict can better ensure that they get a more reasonable deal.
The good news is that modern financial markets are competitive and relatively efficient asset price setting mechanisms. This means individual investors cannot consistently “beat the market” on a risk-adjusted basis. While this might disappoint some investors who believe they are smarter than others, in reality this is very good news. On the opposite side, the good news is that competitive and efficient markets mean that individuals need not be beaten badly by the market either. Investor returns can track a market return quite closely at very low cost.
Such market return strategies do not provide an entirely free ride, because there is always a minimum cost. However, optimal investment practices do amount to a highly discounted ticket, which can get individuals to their financial goals quicker and/or richer. Without optimal strategies, the risk-adjusted returns of the average investor will lag the market return by a much wider margin. This lag will be due to the inferior gross returns of their sub-optimal investment strategies, which are primarily attributable to their unnecessarily high investment costs and taxes.
Therefore, at the outset, the crux of the matter is to learn what does and does not work in personal financial planning and investing. Accepting what you hear or read about personal financial strategies without demanding proof, is an almost certain road to a lighter wallet.