Diamonds - an Investor's best friend?

Just finished watching a clip on one of the major financial news channels. They discussed the benefits of investing in diamonds. At a time when the tax levels in all major industrial nations approach confiscatory levels and more of the same might be in the cards (tax on all cash holdings and bank deposits in the shape of 'negative interest' rates, - watch this space!) the portability and durability of the gems might appear to be a major advantage. But - as always - the devil is in the detail. The promoter who was interviewed on the programme correctly pointed out that there are innumerable categories of diamonds and that the (wholesale) pricing of the stones is only transparent for professionals active in the diamond trade. Retail customers and investors have no option but to use highstreet shops that charge high mark-ups. This will leave the investor out of pocket if ever he wants to sell his holdings. In addition to the loss due to this 'spread' he will also be exposed to the vagaries of a volatile market which could add to any potential losses. Guarantees that are offered attached to various 'investment schemes' should be taken with a (very large) pinch of salt, or better, ignored completely. It is usually less than clear who is ultimately backing these guarantees and what the financial standing of the guarantor is (or under what jurisdiction the guarantee can be called upon).

Warning Signs of bad Financial Advisor

A useful summary of warning signs is given by Suze Orman (CNBC)

• The advisor rushes you into making decisions
• No clear information on costs and fees is provided
• Your investments are not sufficiently diversified
• The advisor wants to exclude your partner(s) from meetings
• Your requirements and personal circumstances are not discussed
• Your questions or concerns are not properly answered
• Statements are not informative or do not arrive regularly
• You receive no regular quarterly and annual reports
• The advisor wants to have direct access to your money and account
• You are not kept informed about important developments

An interesting article on the same subject:

Is Your Money Really Safe With a Financial Adviser?

IPO's - Facebook illustrates risks

The odds in Inititial Public Offerings (IPO's) are all too often stacked against the buyers. Insiders and the promoters of the IPO are interested in obtaining a high price and have a heavy propaganda machine on their side - despite efforts by the regulators to curtail one-sided advertising. There is insufficient protection against the insiders selling too early and investors are advised to favor IPO's where the majority - ideally all - of the funds raised goes to the company. The sale of a large stake by an early investor in Facebook illustrates (CNBC) the controversy surrounding IPO's.

Who really owns your Gold?

Many investors may think that by holding physical gold in their portfolios they are to a certain extent hedged against the loss of purchasing power that is experienced by all major currencies. But make no mistake, only physical gold that you hold in a vault that is controlled by you or in some other safe place is really gold that you can count on when the proverbial s**t hits the fan. Unallocated gold or pieces of paper that represent a claim on gold ('Structured' products, derivatives or ETF's) are nothing else but some bank's or fund manager's obligation and as such only as good as the standing of that institution. If they are insolvent you are left with nothing else than a piece of paper and have to join the queue of creditors.

A simple asset-allocation system

An article in the Financial Times proposes a simple-to-use asset-allocation system. But as always the devil is in the detail as it requires the investor to make quite precise estimates for the expected returns in the various asset classes. In an ideal world the investor would just pick the asset with the highest expected return. But even after taking account of this deficiency the model still is useful as it forces the investor to at least try to quantify his expectations. This discipline will protect him from being over-exposed in any asset class and help to avoid being overly optimistic or pessimistic at major turning points in the markets.

Another Warning about the safety of your assets

Most investors are unaware of the arcane details of bankruptcy law and related aspects of investor protection. But this warning illustrates that politicians and regulators seem to be less concerned with the well-being of investors and have decided to focus on the interests of the finance lobby.

Even arbitration no protection for investors

This case demonstrates that investors should not rely on securities arbitration for his protection as providers of financial services use every legal option to delay or void such an award. The reader can form his own judgement about the morality of such conduct.

Are your assets in safe hands?

Most financial assets are these days represented by bits on some faraway computer. In addition, the owner relies on some third party - a bank or fund manager in most instances - for the safekeeping of his 'bits' (wealth). When new court judgements make this remote control even less secure it represents an extra layer of risk that all investors have to guard against.

How to spot an investment scam

An suspected investment scam involving the sale of derivatives linked to gold has been uncovered in Poland (Wall Street Journal). Based on preliminary evidence the following lessons can be learned: (1) Always check out the credentials of senior management, (2) Do you really understand the investment? In this case I doubt that many - if any - of the investors understood the difference between physical gold and derivatives, (3) Unusual and high marketing expenditures.

Are Stock Markets rigged?

The controversy over 'algorithmic' and high-frequency trading rumbles on and on. While experts and regulators are unable to agree the ordinary investor is well-advised to tread with caution when investing in the stock market.