To invest for a long term goal you should know two number expected return and expected volatility. If you are trying to increase your return because of a lack of disciplined savings you will invariably fail. Unless you are extremely lucky or break the law.
You can learn some valuable lessons from this debacle. Here are some of them:High Returns Mean High Risk
The appeal of investments in hedge funds and commodities is the high return these funds can generate. The enticement of high returns blinds investors to commensurate risk inherent in these investments. The high fees and commission structure of these investments encourages fund managers to take big risks with your money.
There’s no free lunch in investing. Investments in hedge funds and commodities is speculation, not investing. The expected return of speculation is zero, or less when you consider high transaction costs.
Transparency Has Its Benefits
Publicly traded mutual funds are regulated by the SEC under the Investment Company Act of 1940. The Act requires extensive disclosure and independently audited financial statements. Mutual funds are required to have a Board of Directors, the majority of whom must be independent from the mutual fund company. Mutual funds use fund custodians, many of which are qualified banks. The banks segregate mutual funds securities from their other assets. If the mutual fund goes belly-up, customer accounts are safely in the possession of the custodian.
These protections are not foolproof, but they provide the minimal security you should insist on before you entrust your hard-earned money to any broker or advisor.
“Investment Guru” is an Oxymoron
The media is understandably focused on the missing client funds from the accounts of MF Global’s clients. Relatively little attention has been paid for the reason for its demise. MF Global owned $6.3 billion in European debt. This large commitment led to demands for regulators to boost capital based on concern over Europe‘s debt crisis.
When you investing for a long term goal such as retirement, prudence must be the main objective. Beating the market is accomplished by very few and those that do are nothing more than lucky. Skill has very little to do with it.
Please comment or call to discuss how this affects you and your portfolio.
- Interactive Brokers Weighs Deal for MF Global (blogs.wsj.com)
- MF Global in ‘Advanced Negotiations’ to Sell Futures Arm – US Business News – CNBC (themasterblog.wordpress.com)
- Commodities Traders Find MF Global Accounts Still Frozen (blogs.wsj.com)