Don’t listen to your Friends and Neighbors for Retirement Advice!

It is said that humans are social animals, and there’s no doubt that we often do things because other people do them, if only to try them out. When it comes to financial planning for retirement, however, copying what your neighbors or friends are doing can be dangerous to your ability to build up adequate retirement savings.

The reason for this is straightforward: everyone’s financial situation is different, so what works for someone else will not necessarily work for you. While this seems like advice that should be easy to follow, it can be harder than you might think. When your friends and neighbors seem to be making a bundle on the latest hot stock or mutual fund, staying disciplined and not changing your retirement investment plans can be a difficult task.


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You Only Hear About the Big Fish

Not only is it human nature to be tempted to do what other people do, it’s also human nature to focus on the positive at the expense of the negative. What does this mean for your retirement investing plans? Just that if you let the stories others tell you about their investing successes guide you, you risk being misled by what is known as the “big fish phenomenon.” This refers to the tendency of fishermen to tell stories about the big fish they landed rather than the ones that got away.

Translated to investing, this means that you might hear from your neighbor about the time he or she struck it big on a hot stock, without hearing about the numerous losers that preceded that big winner. The point here is that, without meaning to steer you in the wrong direction, people’s natural tendency to emphasize their investing successes and not dwell on their failures can give you the wrong impression about their investing expertise and overall investment performance.

If you are seeking advice from a financial advisor, they are required to fully inform you about the potential risk, as well as reward, of any prospective investment. If you are researching an investment such as a mutual fund yourself, it is relatively easy to get the complete track record of its performance over the years. This is not the case when it comes to tips from your friends and neighbors, so beware of following their lead with your retirement investments unless you have fully researched a potential investment as if you had come up with the idea yourself.

Everyone’s Financial Situation is Different

Even if your next-door neighbor does happen to pick a hot stock every now and then, this doesn’t negate the fact that his or her financial situation is likely to be different than your own. Because of this, what is good advice for one investor when it comes to investing for retirement may not be good for another. For instance, your neighbor may enjoy speculating in high risk stocks because he or she is many years from retirement and has time to make up for any losses investing in such stocks may cause.

If you, on the other hand, are 5 years away from retirement, there isn’t as much time to recover losses. Many investors make the mistake of placing a disproportionate amount of their savings in high risk investments later in life, whether due to “advice” from a friend or neighbor or because they simply don’t take the time to change their asset allocation to a more conservative posture as they get older. If the market crashes this type of approach can have disastrous consequences for your retirement savings, potentially reducing the amount of income you will be able to access in retirement or even forcing you to delay your retirement.

While it’s certainly true that your friends and neighbors may be able to provide some solid investment advice from time to time, the key to successful retirement planning is to focus on the approach that is best for you given your financial situation and investment goals, not what may be best for someone else. To do this, you should map out an investment strategy that is designed in harmony with your retirement savings objectives and risk tolerance, whether in consultation with a financial advisor or by yourself. Once you have done this, you will be able to consider any investments you hear about from other people within the parameters of what works for you, rather than what works for them.

Stick with Your Plan

Unsolicited advice from family members, friends and neighbors is not the only thing that can distract you from following your retirement plan. You might be tempted by an ad on TV or the internet about an investment that sounds like the “next big thing.” Another potential distraction is the desire to speed things up and grow your retirement savings faster by taking more risk.

This desire can combine with the urge to purchase a “hot” investment you hear about from your neighbor, at a cocktail party or at the gym because the investment seems to be doing well for the person who tells you about it. However, as with any other distraction that tempts you into deviating from your retirement investment plans, changing course without thorough analysis is not likely to be a good long-term strategy.

If you, and your advisor if you work with one, have spent the considerable time necessary to fully research and put into place a comprehensive retirement plan, changing direction in midstream without serious thought can be counterproductive. Don’t let the “grass is greener on the other side of the road“ syndrome deflect you from moving steadily towards your goals.

This doesn’t mean, of course, that once you make your retirement savings and investing plans you should never change them. On the contrary, you should plan to regularly review your progress towards your goals to see if any changes should be made to your contribution amounts and portfolio allocation, either with your advisor or on your own.

If a review of your results indicates that a change is needed, you should be prepared to make it within the context of your overall retirement planning. Could this ever involve a suggestion received from a friend or neighbor? Certainly, but given that your friends and neighbors are most likely not investment experts and very probably have different financial circumstances than you, it seems likely that the vast majority of these tips won’t be relevant to your financial situation.

In any case, the point is to not be deflected from following your retirement plan and evaluation process simply because you hear about a trendy investment somewhere. If such a tip was so compelling that you added it to your retirement investment review process and found it to be a good fit, as unlikely as that might be, then so be it. But the key is not to deviate from your retirement plan or process to chase hot tips. Stick with your plan and let it guide your retirement investing, not the latest investment gossip from your friends and neighbors.