This Time is Different!

There continues to be experts proclaiming their ability to predict the future. These experts will use alternative investments or some other ‘magical’ strategy. Most of these ‘experts’ have impeccable credentials with a strong track record.

Bernard Madoff under house arrest 3
Bernard Madoff under house arrest 3 (Photo credit: Red Carlisle)

Money is being moved into these new strategies seeking risk free, high returns. Apparently investors have very short memories.

The late fall of 2008 was highlighted by the confession of Bernard Madoff of Madoff Investments for his $50 billion “ponzi” scheme.

Mr Madoff started his firm in New York in 1960, initially it was a market maker for Wall Street, broker/dealer. Subsequently, Mr Madoff began managing money for individuals and institutions. He is a past president of NASDAQ and a respected professional on Wall Street. His success was unprecendented, he promised as much as a 20% return.

His performance was positive until he confessed this week. Many sophisticated investors and institutions invested enormous sums of money.

He did not hide his strategies, using equities and options. This is where it gets strange based on his strategy and based on the published volume of options he could not have traded the amount of money he purported to have under management. It would be impossible.

The question becomes, how could some of the most prominent banks in the WORLD and many very successful and sophisticated people blindly invest with Mr Madoff? What would possess them to believe the results without proper due diligence?

I believe it is because they wanted to believe because they were ‘rich’ they should earn above average returns with little or no risk. They were wrong.

Will these new experts be successful? I don’t know about the short term, but I doubt their ability in the long term to ‘beat’ the market. Unfortunately, we do not even know for certain which will be successful in the short term.

As I have said because these are free (relatively efficient) markets no one can consistently beat the market, no one knows the future. The most prudent way to invest is to own equities, have a long term focus, globally diversify and rebalance. Any other method is in essence gambling and speculating with your money.

Please comment or call to discuss how this affects you and your portfolio.

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Preventing Investment Fraud

Different risk and return of investment for th...
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There is no substitute for consisitently saving for retirement. Remember no one can predict the future.

If you are like most people, your initial reaction to the question posed by the title to this white paper is “no.”  However, for many investors, the answer is “yes.”  With all of the investment options available today, many investors are intimidated, confused  and frustrated by the investment process.  Recent studies also support the suggestion that many investors are perfect targets for investment fraudor already are victims of investment fraud. For instance,

  • A recent study by Schwab Institutional found that 75% of investor portfolioswere unsuitable for investors given their financial situation and goals.1  Based upon my personal experience, I would put that number at approximately 90% based on issues involving inadequate, or “pseudo,” diversification;
  • A recent study by CEG Worldwide concluded that over 94% of those holding themselves out as wealth managers were more product salesman than wealth manager2;
  • Investment fraud is the number crime against the elderly, affecting an estimated 7.3 million older Americans, or one out of every five senior citizens3. Since that number only counts the instances of fraud actually reported, the number of victims is undoubtedly higher.

During an economic crisis investment fraud surges. The chances of you getting rich quick are remote. As investors we cannot allow ourselves to deviate from our properly diversified portfolio and our long term goals.

Please comment or call to discuss.

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