Friday, July 25, 2008

The Importance of Individually Tailoring Investments is Overstated

The marketing for financial planning companies stresses that you need to have your investments specially tailored to your financial situation. There is a certain amount of truth to this, but it is overstated.

Deciding how much of your savings should go into long-term and short-term investments will of course depend on your individual needs and tax situation. But, once you have chosen to invest a sum of money for the long term, there isn’t much need to take into account your special situation to select investments.

If you choose a stock or fund for very smart reasons, you will get exactly the same return as someone who chooses it because it has a nice name. I’m not advocating choosing investments for trivial reasons, but your investments won’t perform any better for you just because you are somehow special.

Investment advisors will take a different view of all this because their primary concern is that you stick with whatever plan they choose for you. They need to take into account your biases when choosing investments so that you won’t switch to another advisor.

Most investors would do quite well to invest long-term money in a few low-cost index exchange-traded funds (ETFs). This isn’t a very individual approach, but it doesn’t need to be.

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