Keep Your Investments Simple, Because the Alternatives Could Be Worse

As reported by the New York Times (and linked through CNBC.com:  http://www.cnbc.com/id/100449551), retail investors are once again being burned by complex alternative investments.  This is an old story in the annals of investment busts.  The more complex an investment, the less likely a retail investor will understand it, and the greater the advantage an unscrupulous broker will have in foisting it on the unsuspecting.  What's troubling is that many of the victims weren't seeking a fast, speculative buck.  They were often conservative investors who were pushed by the Federal Reserve's scorched earth policy against interest rates to hunt in dark, dank thickets for elusive, ethereal positive yields.  Desperate for investment income, they fell victim to sales people saying what they wanted to hear, but maybe not what they needed to understand.

An underappreciated element of saving and investing is the need to manage risk.  Manage doesn't mean avoiding all risk, and it certainly doesn't mean seeing greater risk as the path to greater rewards.  It means understanding that risk and reward are linked, and that not getting too greedy about rewards is the way to long term success.  Some risk is reasonable, as long as you don't expose yourself to so much volatility that you grab the little paper bag in the seatback in front of you and put all your money in a mattress.  The tortoise beats the hare when it comes to investing.  Searching for quick returns is like donning wings of paraffin and flying toward the Sun.  Don't invest in anything that you don't understand--and that means having a full appreciation for every way your hmmmm can be deep fried.  Simple, steady and average are a decidedly better bet for making you comfortable in retirement than the latest in glam financial fashions.  For more, see http://blogger.uncleleosden.com/2009/11/techniques-for-retirement-saving.html.

How to Spot a Crook

When someone approaches you about making an investment, you have to consider whether you're dealing with a dishonest person. You know the stereotype of a crook: shifty eyes, nervous snicker, sweaty hands, weak handshake, won’t look you in the eye. You’ve seen it in cartoons and movies. You’ve even met some people like this. But were they truly dishonest? Or were they just insecure?

Was every charming, engaging, and witty person you ever met truthful? Let’s disregard the jerks that didn’t call you the next morning. How about the person who promised you a job or promotion that you didn’t get?

You can’t tell by appearances if a person is honest. The annals of law enforcement agencies and financial regulators are filled with the names of charming, engaging people who turned out to be thoroughly crooked. Indeed, many of the most outrageous fraudsters are exactly the sort of person you’d like to have a drink with. The fact that they were so engaging and likeable is precisely why they were such successful con artists.

That’s why you have to be very careful about whom you entrust with your money. All investing involves giving your money to someone else. You can’t earn interest, dividends or capital gains if you stuff cash into a mattress. The money has to be given to someone else who uses or invests it, and pays you from the earnings they make.

Deal with people and institutions that are familiar. People who are known in the community and need to stay in good standing with their neighbors are more likely to be scrupulous. Look for organizations—whether national or local—that have good reputations. While there’s no guarantee that a person or organization known to you won’t be crooked, you’re taking a bigger risk when dealing with unknowns.

Never give personal information to anyone who calls you out of the blue or sends you an unsolicited e-mail. Be wary of anyone who contacts you, claims to be from the government or from your bank, and asks you to confirm personal information, either by e-mail or on the phone. Legitimate inquiries from the government or your bank won’t come in this manner. If someone contacts you and says you’ve won a prize, don’t pay money to collect the prize. Legitimate prizes won’t require you to pay money.

Invest in an asset, not a person (even if you like the person). Don’t invest in something just because a friend, neighbor, or acquaintance recommends it. Ask yourself whether the asset makes sense for your financial goals. You’ll get a lot of information about why the investment is a good idea. Research it yourself, and make sure you understand how things can go wrong. When you understand the risks as well as the rewards, you’ll be able to make a sound decision.

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