This is the website that your financial planner does NOT want you to read
When investment advisors try to get their clients to buy annuities, limited partnerships or other oddball investments that have "front end loads", "entry fees", "early withdrawal penalties", "early exit fees", "redemption fees" or "surrender fees", they are foaming at the mouth over the HUGE commission that they will earn. Instead of pitching investments that benefit YOU, they pitch investments that benefit THEMSELVES!
When investors say "I HAVE GIVEN UP ON STOCKS" this is the start of how they get themselves into trouble through oddball investments sold by commission hungry financial planners" and other salesmen. The best, most successful and most promising companies and investments are liquid and publically traded as stocks, bonds (and ETF's) through your deep discount brokerage.
The only fat checks you write should be paid to the order of your deep discount brokerage firm (such as E Trade, Scottrade, TD Ameritrade)!
Never ever ever ever ever ever hand investment money over to anyone else! Never hand investment money over to any investment planning firm or individual, financial planning consultant, money manager, retirement planner, estate planner, investment strategist, hedge fund, proprietary offering, investment fund, trust, investment trust, etc. If an investment is not available through your deep discount brokerage firm then don't touch it!!!
You can't trust ANYONE with large amounts of money... Period!
PONZI SCHEMES: All too often investors let their guard down for various reasons, such as when they do business with a company or person who is a friend or referred by a friend or family, someone with high profile clientele, someone nice, professional, religious, a philanthropist, well credentialed, well certified, well established, well dressed, young or old, famous, an eloquent speaker, high profile with fancy brochures and website, someone well connected, or even low key and meek. These attributes mean nothing. Con artists usually fit some or most of these profiles. They're the people you would least expect to rip you off, give bad advice or disserve you in any way. Ponzi schemes are not rare. Actually they are constantly being uncovered, and the typical victim of fraud is actually affluent and college educated. Money does not grow on trees and it shouldn't be treated so loosely, yet we constantly hear new stories about everyday people losing HUGE chunks or ALL of their life savings to some sort of investment fraud, con-artist, ponzi scheme, bad investment, etc because they broke the most simple, basic rules of investing. Had these people simply followed either rule #2 or rule #4 (below) they wouldn't be in such financial ruin!
CONFLICT OF INTEREST: There's more than just Ponzi schemes that you need to look out for. Investors are usually completely UNAWARE that they have been victimized by conflict of interest. Investors are disserved every day and usually it isn't even illegal. Understand that investment advisers can earn HUGE back door commissions even when they don't directly charge you any fees at all. How can you trust ANY investment strategist to give advice in YOUR best interest when they earn a hefty 6 to 12% commission when they convince you to buy that annuity, limited partnership, or other bad investment that has an early withdrawal penalty, but earn nothing extra when touting stocks? Whenever you hear the words "front end load, "entry fee", "surrender fee", "exit fee", "redemption fee" or "early withdrawal penalty" attached to an investment, that's code for "your broker will earn a big sales commission if they can convince you to invest in it". Yet no investment adviser will ever explain to their client the many negative reasons why the securities they are pushing, such as annuities, are terrible investments. Typically these investment advisers push long term, non liquid investments on clients even though there is NO need to put your money in "prison".
Also greedy investment advisers are always looking for justifications to call you to get you to buy new securities as often as possible in order to generate more commissions (at your expense). Sure it's against the law for example to switch an investor from one mutual fund to another when there is no legitimate investment purpose underlying the switch, but trying to prove fraud is so difficult that brokers are rarely disciplined for trade orders. How do you prove a broker's motivation to instruct a client to buy and sell???? Essentially you can't.
But let's cut to the chase: I say ANYONE who isn't mainly or only pitching stocks, and stock or bond ETF's is in business for HIMSELF. You could have avoided all of this conflict of interest had you simply followed rule #1 (below) and invested in broad market index fund ETF's.
MYTH: Generally the best way to invest your money is to have it constantly managed by a professional, such as through a mutual fund. Actually studies indicate otherwise.
EXCHANGE TRADED FUNDS (ETF's): Overshadowing all of the many pitfalls of investing (described below) is a little known fact that no investment advisor / broker will ever tell you, and that is that over time the average unmanaged broad stock index (example: the Wilshire 5,000-Stock Index) has actually OUTPERFORMED the average professionally managed mutual fund! That's right. You don't need to pay 1% to 3% per year to any "money manager" to be judge and jury with your money and hold your hand, nor do you need to lock your money up in prison in long term investments that have exit penalties. Even if you are absolutely clueless about where to put your money, investing in ETF's such as WFVK (the Wilshire 500 index) is as easy as tying your shoelaces. Just open an account with a deep discount brokerage firm and place a "buy" order at a cost of about $10 per trade. Done! And you can can sell an ETF at any time for about ten bucks, and without the early withdrawal penalties that are associated with annuities, limited partnerships, "oddball funds", certain mutual funds and other alternative investments. And any profits will be taxed at the lower, more reasonable "capital gains" rate -- unlike some other investments such as annuities which are taxed at the higher "ordinary income" rate just for starters. For someone who doesn't have the time to manage their own money, ETF's are the smart choice. Even Jim Cramer (MSNBC's Mad Money), who devotes about 99% of his show to discussions about stocks, has recommended ETF's to those who don't have the time to study stocks. Evidence suggests that we can take it a step further by saying that most investors who do study stocks and market trends would fare just as well by investing in ETF's than if they were to try to pick and trade stocks.
Instead of trying to be a wall street manager, just hold a mix of broad market ETF's, high dividend stock ETF's, bond ETF's, some gold (perhaps 5 - 20%) and some cash. Then make simple allocation adjustments from time to time. Want more decision making involvement? Invest more in some sector specific ETF's that appear beaten down. If you wish you can always try to "time the market" with ETF's just as you can with stocks.
JUST BUY ETF's!
"All the time and effort that people devote to picking the right fund, the hot hand, the great manager, have in most cases led to no advantage.” -- Peter Lynch, legendary manager of Fidelity Magellan
"By periodically investing in an index fund the know-nothing investor can actually outperform most investment professionals." -- Warren Buffett
"We discovered that with 111 managers, our performance in the aggregate was no better than the S&P 500's, minus fees and commissions." -- John English, Ford Foundation
This article should end here. Unfortunately most investors insist that they can beat the market, or they have become impatient with market performance over the last 11 years. That's when they get into bigger trouble when they seek out an investment adviser or other salesman. They refuse to invest in broad market indexes because ETF's are by nature bland and vanilla. If you insist on putting your money at risk then read on.....
Protecting your money from con-artists and special interest is NOT complicated....
RULE #1:
Don't act on investment advice from anyone who is ALSO trying to sell you the investment or act as your broker!
In particular this includes investment advisors, AKA "financial planning consultants", "money managers", "wealth managers", "retirement planners", "estate planners", "investment strategists", who also act as your broker (READ MORE below). I just call them "financial salesmen", "annuity pushers", "security sharks", "estate eroders", etc. Please note that even lawyers, insurance salesmen, accountants and others may present themselves as investment advisors, hoping to make extra money on the side. Not surprisingly these characters always seem to be over-zealously pitching the very investment products that you should avoid -- namely non-liquid, long-term investments that have "front end loads", "entry fees", "surrender fees", "exit fees", "redemption fees" or "early withdrawal" penalties! If you are also paying your investment adviser an annual fee then they are picking your pocket TWICE! And if they're actually recommending stocks do you really honestly think that these guys are better than the average wall street professional mutual fund manager?? I think NOT!!! And remember, as described above, the average Wall Street mutual fund manager can't even outperform the broad market as a whole after fees. This rule also applies to venture capitalists or even that good friend who needs investors to invest in a private business or other private equity. I am also going to have to put full service brokerage firms on this list for reasons explained later. Obviously you should not take investment advice from company A when company A is also pitching you the investment (directly by phone, on TV or radio infomercials, in print advertisements, via a friend's referral, etc). If you need someone to hold your hand while you invest then only seek investment advice from companies or people who do pure research, don't process the paperwork, don't have their name listed as your "broker" (or "agent, etc) on your investment statements and they don't actually take possession of, handle or manage your money! Free alternatives include Cramer (on MSNBC). Then do your own trading via a deep discount brokerage firm. Deep discount brokerage firms do not give advice and will not rip you off. By the way, if your deep discount brokerage firm can't execute trading for a particular security then consider it unsafe -- you WON'T be investing in it! Again, studies have shown that the average mutual fund manager performs no better (minus fees) than unmanaged index fund ETF's. Rather than just blindly following Cramer's picks, a better game plan is to learn the basic fundamental strategies and then act accordingly. For example: "Tech stocks underperform during summer months", "Low-priced stocks are usually over-valued; High priced stocks are usually under valued", "Don't dig in your hells when you're wrong", utilize various techniques like dollar-cost averaging, etc.
TRAP: A person who appears to have no interest in pitching you an investment usually has their own hidden agenda. Why else would they volunteer their time pitching it? For example: They may be pitching the investment for a friend who will pay them a nice "under the table" commission if they get you to invest in it. If it's a scarcely traded penny stock they may be looking for a way to cash out of their own position in the stock. Beware of anyone who tries to get you to buy scarcely traded microcap and penny stocks. These stock prices can be easily manipulated by just a few investors.
RULE #2:
Don't invest more than 5% of your savings into any one investment or "fund"!
This is as simple as the old phrase "don't put all of your eggs in one basket" or rather "don't put too many eggs in one basket". Shockingly investors break this golden rule constantly and then we hear about them in the news or watch them on MSNBC's "American Greed". Had some of the victims of Bernie Madoff's ponzi scheme followed this simple rule, these people wouldn't have lost their entire life savings! There are NO exceptions to this rule, whether it be a mutual fund, other type of fund, stock, bond, personal business venture, etc, etc. Every investment has risk. NOTE: technically gold and cash are not "investments" but rather forms of "capital preservation" so it's OK to have more than 5% in gold or cash. Some experts recommend as much as 10 to 20% in gold. Also this rule does not apply to personal possessions such as the home you live in, which we won't count as "savings". Also for exchange traded funds (EFT's) you can usually divide the number of holdings to calculate how diversified you are amongst each stock.
TRAP: Just because a "fund" is diversified into many different stocks, bonds, etc does NOT make it exempt from the 5% rule. Bernie Madoff's ponzi scheme was supposed to be a "fund" full of many different investments. Unfortunately it was all an elaborate scam. Some funds such as annuities (which should be avoided anyway) invest in a diversification of stocks and bonds, but your entire investment hinges on the solvency of just one insurance company that writes the annuity contracts!
TIP: The more you diversify the less risk, meaning it's better to invest no more than 1 or 2% into any one company rather than no more than 5%.
Avoid over-allocation!
This rule is slightly different than rule #2. You might do the right thing by allocating your money into a variety of investments that don't exceed 5%, but still manage to put your money dangerously at risk. For example one might make the mistake of investing in a variety of real estate, bonds, mutual funds, and stocks that are too heavily tied to one city, or too heavily tied to one sector (example: the semiconductor sector), too heavily weighted in high risk investments, etc. Or one might make the mistake of positioning themselves in nothing but real estate, nothing but gold / cash, nothing but bonds, nothing but small cap stocks, nothing but foreign stocks, etc. In 2008 we found out just how risky investing in real estate can be! Until then, conventional wisdom said that real estate was "safe". Many people who were over-invested in properties have been decimated by the real estate collapse. The newest "bubble" that has been developing is government debt, and with it some analysts are predicting a collapse in bonds. As of October 11, 2011 the US government's debt is 14.9 trillion dollars, and the US government is still doing nothing significant to stop it. By 2019 the national debt is projected to swell to $18.4 trillion dollars.
TIP: Wealth is built the slow way, gradually, one year at a time -- Not by "swinging for the fences". Unfortunately all too often people take big risks thinking they can strike it rich and beat the odds. Times of recession are NOT times to be taking big risks!
RULE #4:
Avoid private equity investments!
Only invest in PUBLICLY traded investments that are 1) traded through your deep discount brokerage firm and 2) can be researched on everyday financial sites like Yahoo Finance.
Publicly traded stocks, bonds, ETF's, and most mutual funds are the safest investments because they can be looked over on the inside with a fine tooth comb, and they are regulated to death and monitored under a microscope. You may have been spooked by of stories about corruption at Enron, but these are rare instances. Stocks and corporate bonds are the safest way to go.
Avoid investing in private businesses that are not publically traded on stock exchanges. Investing in private equity is the fastest way to lose 100% of your investment. How many times have we heard stories of pro athletes investing in private local businesses and losing it all? It seems glamorous, sexy, and fun but it is anything but. Investors are usually told that private investment opportunities have "enormous potential" but in reality these investments carry HUGE RISK, often fraud is involved, and there is a very high failure rate. Some studies claim that 4 out of 5 businesses fail within the first 2 years. Private equity is so risky that, if you are tempted, you really shouldn't put more than 5% of your money into such investments.
Avoid private funds. Hedge funds are usually privately run and have few public disclosure requirements, making them ripe environment for fraud. In October of 2010 it was reported that John Elway gave 15 million dollars to a hedge-fund manager who is now accused of running a Ponzi scheme.
For every ponzi scheme that gets uncovered, think about how many "quasi-ponzi schemes" are still in existence. Certainly there are hedge funds out there in which the con artists who run the funds are stealing smaller fractions of investor's money.
TIP: If you can't research a fund, bond, company stock, commodity or other investment on Yahoo's Finance site then how can you know details about an investment, inspect it's balance sheet, know what is the going "market price" of the investment, etc??? Just because a stock is listed on Yahoo Finance does not in and of itself mean that it is safe. As previously mentioned, avoid scarcely traded microcap and penny stocks, whose prices can be fraudulently manipulated.
TRAP: You may have heard the old phrase "If it sounds too good to be true, it must be". Well just forget about this rule. If you are AVOIDING private equity (as rule # 4 states) then you won't have to scratch your head over whether an investment is "too good to be true" in the first place.
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