An Investor’s View of Risk

In the real world, investors define risk in a variety of ways.  Mention risk, and many will begin to imagine total, irrevocable, gone-forever loss of their principal.  Fluctuation is not loss of principal.  It is just fluctuation.  Here’s an example that should make the difference clear.  Let’s say you decided that your backyard contains oil. After a million dollars spent drilling, it turns out that there is no oil.  No matter what you do, no matter how long you look at the well, no matter what happens to the price of oil, your money is gone. You have had an irrevocable loss of capital.

Let’s say that you took the same million dollars and bought a diversified investment portfolio (stocks, bonds, hedge funds, proactive asset management).  You then have an unusually bad result the first year, and lose 20 percent of your investment.  Well, you have had an interesting fluctuation, but have not had a capital loss if you can refrain from doing the very worst possible thing and pulling your money out of those investments while the values are down. 

Markets have always recovered in the past. Some took longer than originally anticipated, others faster than anyone can expect.  History indicates that all you must do to recover and go on to acceptable profits is to hang tight.  While an individual stock can go certainly to zero (think Enron, Lehman, and countless others), entire markets don’t.  Except for war or revolution, I am unaware of any market that has gone down without recovering.  As long as we expect the world’s economy to continue to move, the value of the securities markets will reflect that movement. 

Less Is More

Good asset management practices are strategic and evolutionary, not stagnant.  You must keep your long-term goals and objectives firmly in mind while allowing yourself the flexibility to evolve as new research provides better solutions to the risk management problem, or as new market opportunities present themselves.  Discipline is the key to success for the long-term investor.  He or she must not fall into the trap of managing holdings by newspaper headline, sound bites, mindless prediction, gut feelings, or last year’s results.

Developing a successful, modern investment strategy is a lot like gardening.  Both activities require patience, discipline, and faith.  Periodic reviews should be viewed as an opportunity for fine-tuning and corrections, not radical revisions and second-guessing.

How to Protect Yourself From Scam Artists

This list can be endless, but here are common ways many investors get sold on a fly-by-night investment scam.

• Never give any investment advisor a general power of attorney over your account.  Use a limited power of attorney to authorize your advisor to make trades within your account for your benefit.  There is never a reason to name an investment advisor as owner, contingent owner, or joint owner of your account.  It shouldn’t be possible for any other person to ever receive a disbursement from your account.  Your brokerage or trust company should only disburse to you at your home address or to your bank account.  Insist on confirmation of all account activity (this may not need to be sent to you by paper), but easy access to all transactions online should suffice.  Never use your investment advisor’s address as your address to receive statements.
• Select strong custodians for safekeeping of your assets.  Use major brokerage houses or trust companies that are properly insured, audited, and regulated.  Don’t let some Jabba The Hut, little financial institution act as custodian of your assets.
• Remember that if it sounds too good to be true, it probably is.  Con artists almost universally appeal to investor’s greed and unrealistic expectations.  They can’t exist without gullible people willing to believe the unbelievable.  By now you should have a good feel for the range of reasonableness in various investment markets.
• Consider carefully whether you need a guide.  Many investors shouldn’t try to go it alone.  Investing professionally is a full-time job.  It takes specialized knowledge and significant resources.  The field is rapidly evolving.  It takes a great deal of time just to keep up with the research.  Evaluate whether you have the skill, judgment, discipline, and experience to do a proper job.  Your investment plan is your future.  It’s too important to leave to amateurs.  Just because you’ve read some book on how to perform surgery does not make you a surgeon.
• Avoid commission sales.  All financial professionals get paid.  And, of course, all of them have an interest in attracting your business.  You can’t expect any of them to send you to the competition.  How they get paid, however, can have a very significant effect on the nature of their recommendations.  In fact, how you pay for advice may be much more important than how much you pay. 

Home prices falling faster in most metro areas

By The Associated Press

NEW YORK – Home prices are falling faster in the nation's largest cities, and a record number of foreclosures are expected to push prices down further through next year.

The Standard & Poor's/Case-Shiller 20-city home price index released Tuesday fell 0.7 percent in September from August. Eighteen of the cities recorded monthly price declines.

Cleveland recorded the largest decline. Prices there dropped 3 percent from a month earlier. Prices in San Francisco, Los Angeles and San Diego, which had been showing strength this year, also dropped in September from August.

Washington and Las Vegas were the only metro areas to post gains in monthly prices.

The 20-city index has risen 5.9 percent from their April 2009 bottom. But it remains nearly 28.6 percent below its July 2006 peak.

And home prices have fallen in 15 of the 20 cities in the past year.

Prices rose in many cities from April through July, mostly boosted by government tax credits which have since expired. Job worries and record high foreclosures are dampening buyer demand and weighing on prices.

The national quarterly index, which measures home prices in the nine U.S. census regions, dropped 2 percent in the third quarter from the previous quarter.

This is a repost from: http://news.yahoo.com/s/ap/20101130/ap_on_bi_ge/us_home_prices

A New Breed of Financial Advisor

Deregulation, along with advances in Internet Technology, has spawned an entire new breed of professional advisor.  Fee-only advisors can now operate from any place with a plug-in phone line and an Internet connection, bringing low-cost, independent, objective, professional advice of high quality and sophistication right to the investor’s neighborhood.  The clear separation of the sales or brokerage puts the advisor on the same side of the table with the client.  Wall Street’s abuses have been so frequent, and the advantages of fee-only compensation so obvious, that the demand for the new advisors has fueled explosive growth.  While fee-only is a far better way to deliver service and advice, it doesn’t guarantee competence or even honesty.  Investors must still do their due diligence when selecting an advisor.  Investors should get familiar with the SEC’s website or FINRA.  Both sites offer tremendous information for researching legitimate financial advisors.

All that remains is for the individual investor to take advantage of the gifts he has been given.  Everywhere the investor looks, things are better and growing better still.  But the investor must look.  The brokerage industry, the fund companies, and the media all have no deep commitment to providing fundamental education for the investor.  Bad advice is far more profitable than good advice for nearly all players.  Wall Street’s profits are simply not linked in any way to investor profits.  As long as turnover is high, the Street wins either way.  With almost 20,000 mutual funds clamoring for shelf space and public attention, hype is the order of the day in fund advertising.  And, as long as Americans will buy dangerous drivel posing as serious financial commentary, the medial will happily provide it.

America is a land of shocking financial illiteracy.  Few investors have any kind of long-term plan at all; few recognize the dimensions of the problem facing them, yet most are supremely confident of their abilities.  Most indulge in self-destructive financial behavior and lack even basic discipline.  Predictably the results of this muddle are dismal.  Projecting these results forward generates visions of almost unimaginable financial hardship as the boomers march off to retirement without the financial assets to sustain them.