| This month’s topics:
Madhoff Insurance, Investment Philosophy & Spring/Summer Special
Madhoff Insurance: Personal Accountability and Due-Diligence
At eFinPLAN we have advocated a unique approach to personal finances —personal accountability and partnering with professionals. Personal accountability means taking time to learn about financial concepts, properly managing cash flow and doing a lot of your own financial planning and researching the firms with whom you do business. Partnering means engaging trusted professional advisors (financial planners, investment specialists, accountants, attorneys, bankers and insurance agents) at a higher-informed level. This approach will start you off in the right direction in preparation for making good decisions.
Informed investors know to avoid temptation by the ‘Madhoff’’s of this world who promise or have a reputation of paying people a high rate of return, with perceived low risk and low volatility (low fluctuation in rates of return or income paid), or to invest in things that are so complex that even the people offering them don’t understand them. They also know the right questions to ask and expect to be provided understandable answers and documentation about products and services offered. People taking personal accountability take the time necessary to ask the questions and do research.
It is inconceivable that some very large banks, charitable organizations, investment firms and wealthy people didn’t ask for important financial information about the firm before or during the time they invested with Madhoff. Interestingly, the few wise people that investigated Madhoff before investing were not given the information and were turned away by his organization. Prudent, wise investors know what to look for or what to avoid by reading books and visiting websites like www.finra.org, www.ftc.gov, www.consumeraction.gov.
Wise investors write investment checks or transfer funds to financial institutions, not to individuals; they are cautious, they aren’t in a hurry, and they don’t make emotional decisions. They have gained an understanding and familiarity with the people, firm, broker dealer or registered parent investment firm (e.g., Schwab), and they are provided with all sorts of documentation about the products and firms with which they are doing business. They receive regular statements directly from the broker dealer home office (not a local branch) to their address. Informed investors get Web access to their account, so that at any time they can log in and see live activity, values, and other information.
Investment Philosophy All investment philosophies get called into question during times of economic crisis. Some investment gurus are tossing out such ideas as the tried and tested ideology of asset allocation, but, “Is that a good idea?” First of all, there are no perfect investment philosophies. Like all academic philosophies, they get tried and tested, and through time their flaws are exposed by market changes, and then they evolve.
This is a natural economic process. Emotion sometimes tells us that when something doesn’t work in the short run, especially during economic turmoil, we should abandon ship. Advertisements to invest in gold and precious metals abound as companies take advantage of the emotional turmoil and confusion caused by this crisis. New investment philosophies also emerge. Calm minds should prevail when it comes to moving large portions of investment portfolios away from well built and managed accounts.
Some favor diversification in the types of investments (e.g., stocks, bonds, cash), sectors (e.g., technology, utilities, real estate, metals) and investment philosophies (e.g., passive, active, market timing). Diversification is useful because it may prevent you from putting all your eggs into one ‘poorly performing’ basket while not missing out on something that performs really well.
With smaller portfolios, the investor is usually able to intelligently have both investment and sector diversification utilizing mutual funds; with larger portfolios, the investor is able to more easily utilize several investment philosophies with the help of professional money managers.
I imagine that most professional money managers whose clients want to move a large percentage of their investments into metals, hybrid, and other investments will resist, preferring caution. They may want them to consider perhaps increasing those areas somewhat, while continuing to abide by their investment philosophy and long-term approach. Talk with your money managers, not just about these types of investments, but about how their management philosophies may be evolving to take into consideration the new research that is being done. Spring/Summer Special We have decided to continue the Spring special 15% off the yearly eFinPLAN subscription to new subscribers through August 31st, enter coupon code spring09.
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