Investment Advice Among Friends

My friend Karen was visiting last week and asked me if she should consider shifting more of her portfolio into stocks.  I almost always shy away from offering investment advice to family and friends since that’s a good way to damage a friendship.  However, when I asked Karen why she was interested, she mentioned that one of her former classmates had referred her to his investment advisor who was trying to get her to put her money in an advised account, of course for a fee.  I decided to break my rule and give some broad general advice to Karen since it seemed timely.  I would offer this advice generally to friends that have accumulated some assets:

–Most people don’t need an investment advisor--although there are a small number of people that really do need an investment advisor, and similarly most people should learn a few basic things about their own investments

–If it sounds too good to be true, it probably is; thus if the market rate on money market funds is 2%, something offering 10% has to have extra risks

–There’s no such thing as a free lunch (you could say this is a modified version of the above)

–I’m an indexer– this is not intended to bias anyone’s views, but for full disclosure, almost all of my investment portfolio is indexed

–Be sure fees are transparent

After our discussion and pointing Karen to a few things to read, she came to the decision to put aside about 6 months of living expenses into cash investments (bank CDs and money market funds), and to invest the rest in low-cost broad index mutual funds, with 1/3 in bonds, 1/3 in US stocks, and 1/3 in international stocks.  Although I might have chosen a slightl different asset mix, I think she did pretty well.

posted at this week’s Carnival of Personal Finance