The “invest in what you know” school of investing was popularized by legendary mutual fund manager Peter Lynch in his best-selling book One Up on Wall Street.
In that book, Lynch wrote about buying the stock of Dunkin’ Donuts because he liked the coffee and Hanes because his wife wore the company’s L’eggs pantyhose.
Today, many investors still follow this strategy, buying the stocks of companies they like because they assume others will like them as well.
As interesting as that concept is, however, it may not be a good strategy – at least not for the bulk of your investments.
One reason is the tendency individual investors have to simplify the strategy.
Lynch didn’t just buy Dunkin’ Donuts and Hanes. He thoroughly researched them first. In fact, in One Up on Wall Street he writes that “finding the promising company is only the first step. The next step is doing the research.”
Indeed, the ability to research stocks – not great taste in coffee, pantyhose and other products – is what made Lynch such a great investor.
That’s because even if a company makes a great product, it may not have the quality of management, solid balance sheet or other qualities to grow and increase stock value.
Understanding these ideas takes some financial knowledge and skill.
That’s not to say individual investors can’t research stocks. Many can and many do with success.
But do you really want to spend your time poring over balance sheets and financial projections?
If not, that’s where a financial advisor is helpful.
A financial advisor can help you analyze stocks and mutual funds and decide which ones work for you.
You get the benefit of solid financial knowledge without expending the effort and time to do all the research.