How to protect your money

We repeatedly warn against the dangers presented by investment scams. A few simple rules (Marketwatch) should be enough to weed out the most obvious frauds but that leaves the question of how to make sure that investment advice you get from reputable firms is as good as is promised in the glossy brochures you receive from them. A key rule should be to always ask for their (published) performance record and make sure that the way your portfolio will be managed in way so that it will match the performance of the model or master portfolio. All-too-often individual advisers are left to handle the client's portfolios which means that different clients get wildly diverging investment results even as they are clients of the same firm. When the adviser gets hefty bonuses based on the commission he generates from the customer account there is an extra risk that your interests will not be served in the best possible fashion. Even worse is a situation where the financial adviser consults with you before making any investment decision. While this may flatter the ego of many a client it also gives the adviser an escape when things turn out badly. He will put the blame on you and 'the market' while happily pocketing his 'advisory' fee.

Financial Trust Index

This interesting survey merits attention by all those who are dealing with financial institutions and markets. Many other (or most?) professions are held in similarly low esteem but it is always useful to avoid being all too trustful and not fall for the siren songs of smooth advertising and sales pitches.

Fund and Adviser Selection - Do not delude yourself

"An actively managed portfolio consisting of five funds held for 20 years had only a 2 percent chance of beating a comparable portfolio of index funds" says a new study by Richard Ferri (Forbes)

Wall Street 'Eat-what-you-kill' System

The claim by the ex-Goldman Sachs staffer Greg Smith should not surprise anyone. Business by definition features an inherent conflict between seller and buyer. While one looks to achieve the highest price possible the buyer wants the exact opposite. Competition (and a dose of ethics) provide the safety valve against the exploitation of customers. The egregious margins achieved in other sectors of the economy - luxury goods for example - could easily also be accused of 'eating and killing' the customers. The lesson that should be learned by all investors - be they small or large individual investors or 'sophisticated' institutions - is that 'buyer beware' is essential when considering to enter into financial transactions, - especially when the other side possibly has an information advantage and is incentivised to exact the maximum possible gain from the counter party.

Are you destroying your Wealth?

An interesting new study documents the mistakes that individual investors make when they invest. Unfortunately the professional investment advisers more often than not commit the same errors and also need to be closely supervised to avoid unpleasant surprises.

ETF Gold does not equal Gold

Many Investment Pundits recommend Gold as the ultimate protection against currency depreciation. So investors often are tempted to buy Gold-themed ETF's as they are convenient to buy and sell. But apart from fine differences between all the available ETF's that are linked to the price of Gold investors should also be aware of possible pitfalls (The Market Oracle) that are inherent in the way some of these ETF's are structured.

Derivatives, the Devil and the Holy Water

Most private - even if sophisticated - investors will have never heard of Warren Buffett's famous dictum where he described derivatives as 'financial weapons of mass destruction'. We always have advised readers and clients to give derivatives (including 'structured' or 'guaranteed' products) a wide berth. Most investors - including Yours Truly, do not have the capability to look behind the complicated financial mathematics that is required to properly understand these concoctions. Neither do we have the slightest desire as it would be a futile exercise. If properly priced these instruments basically are a chip to participate in a financial bet that is a zero sum game. And half the participants are by definition destined to loose. We leave it up to the imagination of the reader to guess on which side a part-time investor will find himself when he pits his wits against highly motivated (because highly paid) financial engineers who do nothing else but design 'products' that allow them to profit from the losses of the other party to the bet. A particularly drastic illustration is provided by the latest revelation of the popular game played by blue chip (and lesser) financial institutions called heads I win, tails you loose. Does a storied bank with a reputation to loose really need to sell a 'variable prepaid forward' to an unsophisticated lady? The lesson is clear: ordinary private investors should stay clear of derivatives like the devil from the holy water!

Watch the money-weighted rates of return on funds

Most investors find it difficult enough to understand the performance data they are given by providers of investment funds. Few, however, will realise that these numbers can be quite distorted as they usually are not calculated on a money-weighted basis. This difference, while small on an annual basis, can add up to quite a substantial amount if the investor holds the fund for a number of years. The cumulative loss can reach 60 per cent over 15 years as has been reported in a new book by investment fund pioneer John Bogle.

Investment Scam Watchlist

$500 million ponzi scheme uncovered - Intelligence no proof against Greed (Handelsblatt)

Ex-Hedge Fund CEO Pleads Guilty to $4 Million Fraud (Bloomberg)

Former stockbroker faces jail over £32 million fraud (Daily Telegraph)

 
Japanese Asset Management fraud may have cost investors $2.49 billion (Reuters)

Smart Investors fell victim to $1 billion scam (Barron's)