I have a personal philosophy: I try to only take advice from experts. Some subjects are definitely too nuanced for a hard line like this, but for most topics where there are experts, I do my best to seek them out when I need help.
For example, I shy away from taking relationship advice from folks who aren’t in happy relationships.
I also don’t take nutrition or fitness advice from just anybody—my personal trainer is gorgeous, she’s lean and ripped (so I know she knows what she’s doing) and I do whatever she tells me to do.
Of course it isn’t a universal law that you have to have accomplished something to give good advice about it, but the quality of the advice is going to be hit and miss. I want to get advice from people I am certain possess the skills to accomplish what I’m up to.
And money and investing is definitely a topic where there are subject matter experts.
So if you’re a lady who is committed to your own financial success, and your guy offers you money advice, what do you do with it?
I see it all the time in my own financial planning practice. I work primarily with affluent women, and the vast majority of them have called me at some point to ask me about a piece of advice given to them by the man in their life. Unfortunately, I very rarely hear that these guys are offering up solid advice.
One female client had her new boyfriend tell her to sell out of the stock market to buy rental real estate and gold. Another client’s husband insisted she do early stage investments in his buddy’s startups (she did two before she told me about it and ended up losing $40,000). And a friend of mine once told me that her boyfriend had suggested she invest her student loan proceeds in penny stocks (I almost fell out of my chair on that one).
So you can see it’s important to be able to separate the good advice from the bad.
The Role of Overconfidence
To understand why they do it, first understand that men are more prone than women to suffer from overconfidence in the area of money. Overconfidence is a well-documented cognitive bias in which our subjective confidence is far greater than our objective rightness. Basically, we (human beings) think we are better at stuff than we actually are.
Women aren’t typically overconfident in the in the area of money, though. We are more prone to have overconfidence in other subjects—we think we’re better than average drivers when we aren’t, or that our kids are smarter than average when they’re not (don’t kill the messenger!).
Jeff Sommer described in his 2010 New York Times article how overconfidence leads men to underperform women in the stock market. Men are overconfident in their ability to predict market movements, they trade ineffectively, have high costs and end up buying high and selling low. Some studies have found that the average woman produces an annual return up to 3% higher than her male counterpart! Compounded over time, that 3% can mean hundreds of thousands of dollars in higher account values.
How Can You Tell if You Should Take His Advice?
It’s pretty easy to tell if your guy is someone whose financial advice should be heeded. You just need to figure out if he’s an expert! Ask yourself these questions:
Are his finances in order?
This is absolutely a prerequisite to being a money expert. He’s got to walk the walk. If he has good and consistent income, consciously spends less than he makes, and invests to achieve his long-term goals, that’s a very good sign.
Does he have an investment philosophy?
If he’s giving you investment advice, he had better have a well-researched philosophy. Investing has been studied extensively by some of the world’s smartest minds. It is a science and should be completely free of emotion, guessing, and future-telling. If he is imploring you to put money into his brother’s restaurant, buy last month’s big winner of a stock, or insisting that this or that sector is going to outperform, gently tell him, “I just don’t think that’s for me, sweetie.”
What returns does his own portfolio earn?
If he does have an investment philosophy, how well does it work? You can earn a long-run average of about 10% per year just by buying (and holding) a few specific low-cost, well-diversified index funds. So if his own investment philosophy isn’t netting a return higher than that (you need to see about 10 years of data to prove it), why deviate from best practices?
I’d love to hear about your experiences of getting money advice and how you handled it.
Hilary Martin, MBA, CFP®, is an author, speaker and financial advisor who specializes in working with women. Hilary has been featured in the Wall Street Journal, and she is a regular contributor on NBC, Bloomberg News, Morningstar and FOX. In 2013, Hilary was invited to give a TEDx talk called The Surprising Power of Language to Make You Rich. She regularly writes about personal finance on her blog, Healthy Wealthy Families. You can find her on Twitter @WealthyFamilies.