Why Following Endorsements Can Damage Your Portfolio

We are all susceptible to influence from people we admire or look up to.

While this may be a good trait in imbibing some traits or practices; following influencers and their endorsements can be harmful to your investments.

In personal finance, the Influence-from-Mere-Association Tendency plays a key role in shaping our financial decisions, often without our conscious awareness.

This cognitive bias leads us to form opinions or make decisions based on associations, rather than on objective analysis or factual evidence.

In investing, this tendency can manifest in various ways, from the brands we trust with our investments to the financial advice we choose to follow, often influenced by the mere association with success, prestige, fame or familiarity.

What Are Investment Endorsements?

Investment endorsements are public statements encouraging consideration of a product or service. They include celebrity ads, influencer posts, expert quotes, awards, and customer testimonials. Some endorsements are paid and must be disclosed, while others are implied through repeated brand association. Although endorsements can help you discover options, they aren’t proof that an investment suits your goals or risk tolerance. People often associate fame or familiarity with safety and success, which can cloud judgment. Therefore, treat endorsements as a starting point only; always verify details, read documents carefully, and evaluate risks and costs before making investment decisions.

The Role of Association in Financial Decisions

The Influence-from-Mere-Association Tendency can significantly impact our spending habits and investment choices.

For instance, individuals might prefer certain investment funds or stocks simply because they are associated with well-known, successful companies, regardless of the underlying financials or market conditions.

Similarly, the endorsement of financial products by celebrities or influential figures can sway our decisions, leveraging the power of association over rational judgment.

Managing Association Bias

Recognising and mitigating the effects of this bias in personal finance requires a conscious effort to separate mere associations from substantive, evidence-based financial planning.

Here are some steps to manage this tendency:

1.   Critical Evaluation: Before making a financial decision, critically evaluate the reasons behind your choice. Ask yourself whether the decision is based on solid financial principles and data or merely on the association with success, prestige, or familiarity.

2.   Research and Due Diligence: Conduct thorough research and due diligence on financial products, services, and advice, regardless of their source or associated brand prestige. Look beyond the surface and assess the fundamental value and potential risks involved.

3.   Seek Independent Advice: Consulting with an independent financial advisor can provide an objective perspective, helping to counteract the bias introduced by mere association. Independent advice can help identify the best financial strategies and products based on your unique circumstances and goals, rather than on popular associations.

Brand Loyalty in Financial Behaviour 

Brand loyalty, a specific form of the Influence-from-Mere-Association Tendency, can also affect financial behaviour.

While loyalty to a particular financial institution or product can be based on positive past experiences, it's important to remain open to alternatives that may offer better returns, lower fees, or more suitable features for your financial situation.

Overcoming Association Influence

To overcome the influence of mere association in personal finance, it's crucial to foster a mindset of scepticism and curiosity.

Questioning why we feel drawn to certain financial decisions and whether those feelings are justified by facts can help us make more informed choices.

Additionally, diversifying sources of financial information and advice can expose us to a wider range of perspectives, reducing the risk of making decisions based solely on association.

Making Informed Financial Decisions

The Influence-from-Mere-Association Tendency is a powerful force that can subtly sway our financial decisions, often leading us away from the most rational or beneficial choices.

By recognising this tendency and adopting strategies to mitigate its effects, we can make more informed, objective financial decisions.

This involves critically evaluating our motivations, conducting thorough research, seeking independent advice, and maintaining a healthy scepticism towards associations. 

Ultimately, the goal is to base our financial decisions on solid evidence and principles, rather than on the mere association with success, prestige, or familiarity, paving the way for financial stability and growth. 

 

How to Evaluate Investment Advice the Right Way?

Look for Credibility and Licensing

Begin by checking who is giving the advice. In India, look for SEBI registration where applicable, such as Registered Investment Adviser or Research Analyst. Verify the registration number, track record, and complaint history. Ask how the person is compensated. If earnings depend on selling a product, a conflict of interest may arise. Request written disclosures, including fees, commissions, and any revenue-sharing arrangements. Prefer advice that documents assumptions, data sources, and methodology. Credibility is not about follower counts. It is about professional accountability, transparent processes, and clear disclosures.

Focus on Fundamentals, Not Fame

Evaluate the product, not the personality behind it. Match the recommendation to your goal, time horizon, and capacity to handle losses. Review key facts: expected return drivers, risks, charges, liquidity, and tax treatment. For bonds, check the credit rating, maturity, coupon rate, yield to maturity, covenants, and early redemption features. For market-linked products, understand volatility and the scenarios in which returns can be lower than expected. Compare like-for-like using the same timeframe and risk level. If any metric or promise is unclear, pause and request written evidence.

Use a Framework for Decision-Making

Adopt a simple, repeatable checklist.

1. Define the goal, amount, and deadline.

2. Set risk limits and the maximum drawdown.

3. Collect documents such as offer documents, term sheets, or factsheets.

4. Run a basic scenario test: base case, optimistic case, and conservative case.

5. Compare at least two alternatives in terms of cost, risk, and liquidity.

6. Decide using a short investment note that records why you chose it.

7. Sleep on it for 24 hours before clicking buy.
    

This small discipline reduces bias, improves clarity, and keeps endorsements in the right place as inputs, not instructions.

Frequently Asked Questions

Q1: Are all investment endorsements bad?

No. Endorsements can aid discovery, not decision-making. Treat them as marketing. Verify SEBI registration where applicable, read the offer document or factsheet, and test suitability for your goal, horizon, and risk capacity. Check costs, liquidity, and tax impact. If the only reason to buy is the endorser’s fame, pause and reassess.

Q2: Why do influencers promote financial products?

Mostly to earn income and expand reach. Deals may include fixed fees, affiliate links, or revenue sharing, which creates conflicts of interest. The content is general and not tailored to you. Look for paid-promotion disclosures, understand how they are compensated, and verify details with primary documents before considering any action. Assess their suitability for your goals.

Q3: What should I do before acting on an endorsement?

Verify the adviser’s SEBI registration, if applicable. Read the offer document, term sheet, or factsheet. Map the product to your goal, timeline, and loss capacity. Compare at least two alternatives in terms of risk, cost, and liquidity. Write a short decision note and, if unsure, consult a registered adviser.

Q4: Can I lose money following celebrity investment tips?

Yes. Celebrity tips can be poorly timed, unsuitable for your risk profile, or silent on key details such as fees, exit terms, and downside scenarios. Acting on fame can lead to concentration, diversification, and avoidable losses. Based decisions on documents, data, and your plan, not popularity or social proof. Consider position sizing and stop-loss rules.

Q5: How can I protect myself from misleading endorsements?

Protect yourself with process. Check paid-promotion disclosures and verify SEBI credentials. Obtain written product details and read official documents. Score each option on risk, cost, liquidity, and tax. Cross-check claims with at least two independent sources. Avoid urgency cues and FOMO. When uncertain, seek independent, fee-only advice. Document your reasoning before buying.