Misconceptions about trading – Leaving it to professionals

Life of a Trader 20 Mar 2024

When it comes to the financial markets and growing wealth, most people will think of leaving it to the financial advisors. However, sometimes there may be underlying reasons on why it may not be the best solution. In this podcast, Vee explains why.

Transcript (Abridged):

So for today, we’ll be discussing some common misconceptions about trading, starting with the idea that it should be left to professionals. Many people believe that the investing process or trading your savings should be left to professionals, especially if you’re unsure about what you’re doing. The notion is that engaging in risky investments without proper knowledge could be detrimental. However, it’s not necessarily true that it’s better to just leave it to the professionals. This is because professionals are not always incentivized to help you grow your money. In fact, their primary motive is often to generate fees from you.

Of course, achieving great outcomes for their clients is a goal, but for many, generating fees takes precedence. Without a clear understanding of what these professionals are doing or their motives, you might not achieve the best investment outcomes. More often than not, they might chase the latest trend that sells well with their other clients, urging you to switch investment products frequently to generate more fees.

This fee-driven motive has been evident in the past, such as before the 2008 financial crisis, where many financial advisors sold market products that turned out to be poor choices, like equity-linked notes and bonds that went to zero. These examples show the dangers of placing too much trust in advisors focused on their own earnings rather than your financial well-being.

Moreover, during bull markets, the advice often leans towards just buying and holding without considering the importance of managing losses, which can lead to buying into more products to incur additional fees. This might sound cynical, but it reflects the reality of how the investment world operates. Therefore, entrusting your trading progress or investments to professionals should come with scrutiny, especially regarding their fees and incentives.

If you do choose to work with investment professionals, ensure that their fees are reasonable and that they’re genuinely outperforming the market. Opting for investments with lower fees and less active management can be more beneficial and cost-effective in the long run.

However, many successful retail investors don’t come from specialised backgrounds; they simply possess a solid framework for managing risk. Knowing your limits and only risking what you can afford to lose are key principles. Strive for asymmetrical outcomes, where the potential gains far outweigh the losses.

This misconception that trading should be left to professionals overlooks the value of learning the process yourself. Even if you ultimately decide to use professionals, understanding the basics will help you make informed decisions about whom to trust with your investments.