Bernie Madoff

Everywhere I look in the investment media someone is talking about alternative investments. This is what the sophisticated investor is looking for. Many are still smarting from the tech crash of the early 2000’s and more recently the 2008 housing crash. They feel there must be a better way, at least for sophisticated investors like them.

English: Bernard Madoff's mugshot — English: Bernard Madoff’s mugshot (Photo credit: Wikipedia)

Your wish is my command. The Wall Street bullies have a ‘product’ for every season. You want alternative investments you got them. These alternative investments can include:

Managed futures
Private equity
Long/short ETFs
Leveraged products
Commodities (including gold)
Hedge funds
Real estate

Of course, this list is not all inclusive. But the message is clear these ‘products’ are for ‘sophisticated’ investors looking to juice up their returns. The pain of the recent crashes is fresh on their minds and they want to avoid the pain. This is a prime example of gambling and speculating with their investment dollars. This is not prudent investing.

The equity markets include all of the above. The Wall Street bullies are just telling you to overload in a specific market sector. Many of the above are described as inflation hedges. Except when you look closely. The inflation is not nearly as volatile as the alternative asset classes used to hedge it. WHAT???

Predictions and forecasts can all be rationalized after they are wrong. ‘It didn’t happen like I said it would because…column A, column B or whatever’.

Whether you are a ‘sophisticated investor or not working with an investor coach/fiduciary adviser will lead to successful results, long term. Each investors needs to develop their own portfolio and understand the level of risk they are assuming.

Remember Bernie Madoff had hundreds of ‘sophisticated’ investors looking to avoid losses and earn superior returns.

Stop empowering the Wall Street bullies and follow three simple rules of prudent investing:

Own equities and high quality short term fixed income.
Globally diversify.
Rebalance.

Although these are simple rules they have proven very difficult for individual investors to follow, consistently. In most if not all cases it will require the assistance of an investor coach/fiduciary adviser.

January of each year is the time for new predictions by the gurus of the past. Some made masterful trades, such as, exiting the market prior to the 2008 market crash. The investing public eagerly awaits their ‘wisdom’ on the market direction and what asset classes to invest their money. It could be stocks or real estate or gold or cash etc.

What the public does not realize is that these past trades/recommendation were a matter of LUCK and not skill.

The most notorious of these gurus includes Bernie Madoff. At one time Madoff was the money manager to the wealthiest and most sophisticated investors in the world. One investor said that “if you were not invested with Bernie Madoff you were a loser”. This trading scheme like many which relied on an accurate prediction of the future eventually failed. Madoff was only able to stay on top due to fraud.

If the investment strategy your broker recommends relies on an accurate prediction of the future you are speculating with your money.

The media loves to promote the wisdom and insights of managers with “hot hands” or the “Midas Touch”. They gleefully put them in advertisements and on magazine covers. These gurus are often featured one of two years later in derogatory articles about how their investing prowess has mysteriously disappeared. They die in the pages of the Wall Street Journal or Money Magazine.

Stock pickers and market timers, getting in and out of the market at the right time, need you to believe that they can predict the future. The markets are far too efficient to allow this. The markets are random and unpredictable.

This really means that all the knowable information is in the price of the security right now.

There will always be stock pickers and market timers that outperform for the short term. The problem for investors is that there is no correlation between past performance and future results. In other words past success by a money manager is short term and not sustainable.

The Wall Street bullies use these short term successes to market the next great strategy. Remember the bullies make money when money moves/trades.

To succeed in reaching your long term financial goals requires you to