More often than not, stocks, mutual funds and investments are ’sold’ to the general public. Investments is not like the furniture business where customers look for what they want. All the public has to do is say ‘I’m interested’, and there’ll be hordes of information waiting to sell you and tell you what you need.

Take a look at this article about managing risk through diversification. It is a sound article except for the sales tactics and overtones that fail to leave the article. I’m not saying that the author is trying to sell you something, rather I see that he is regurgitating the same sales talk from financial institutions and advisors alike. Let’s examine this closer!

I agree with the author that managing risk is a concept many novice investors fail to grasp. They are more than willing to jump on a hot stock tip when times are good. To contrast the idea of diversification that the article presents, I present some sage advice from Warren Buffett - “Diversification is a protection against ignorance. It makes very little sense for those who know what they are doing”. Truth be told however, how many people know what they are doing? And of those who don’t know, how many are really willing to learn by educating themselves, rather than listening to someone else?

Do I support diversification? Absolutely! I support diversification for those who don’t know what they are doing, or do not wish to learn. I also support diversification for those who do know, because they are many terrific fund managers out there that can help you. What I don’t support is how diversification is sold to you in the article.

The age old comparison of money under the mattress has been brought up like a broken record since financial advice began. This example may have made sense during times when people practiced it because people of that era did not trust the bank. Nowadays, you cannot find a person who does not have a bank account. This extreme example now serves only to monger fear and evoke emotions. And emotions is the real big selling tool! The example is no longer relevant and is not real advice, just sales talk!

The articles uses the term ’super-cautious investor’ to describe people who keeps hordes of cash under mattresses, or in GICs and term deposits. But there is NO such thing as a ’super-cautious investor’. Let’s just call them who they are - they are savers, not investors! Let’s not try to confuse the public into thinking that they are investing, just so that we can lead them to other investments. This false sense of security is what gets many in trouble with unscrupulous advisors recommending the hot fund of the year.

To the article’s credits, the author did recommend some very good funds with low MERs, long admirable track records, and very good fund managers overseeing them. Kudos on that!

MoneySense.ca: ‘Safer than cash: how to manage risk’ by Duncan Hood