Beware of Economic Forecasts

When a leading investment manager states that there is a '60% Chance of Recession in the next 3-5 Years' the firm unwittingly confirms that predicting the economy is nearly worthless as a tool to base your investment decisions on. Nebulous forecasts such as these should be considered to be advertising for the fund manager and a way to get attention in the financial media circus hungry for the next eye-catching headline.

Hedge Fund Performance: do not compare Apples with Oranges

Comparing Hedge Fund performance with the S&P Index is comparing apples with oranges (Goldman Sachs Report). One may have a critical view of Hedge Funds – and they are far from perfect – but they are expected to provide satisfactory returns on a risk-adjusted basis and diversification away from mainstream investments such as large-cap equities that dominate the major stock indices. A less simplistic analysis is needed and in addition those looking to invest in hedge funds need to fully  understand the instrument rather than being taken in by a sales pitch.

How to spot a bad financial planner

Useful article on Money-Rates.com

Eurozone banking - prepare for the Big One!

In 2005 I warned in another blog that to keep one's money in Italian government bonds that yielded a paltry 10 basis points more than German Bunds was not sensible. Now that a certain sense of normality has returned to financial markets in the Eurozone it is easy to forget the major risk that still exists when the next Euro-Quake hits the headlines. Investors have a short memory - only two months ago depositors in Cypriot banks were unilaterally stripped of (part) of their wealth. So I would urge any reader to consider transferring his bank deposits into Eurozone countries that can be considered 'safe' (hopefully there are some that deserve that description). Interest paid on deposits is ludicrously low in all countries so there is very little loss if money is moved out of vulnerable countries and their banks. But the upside is substantial as any break-up of the Eurozone would lead to major losses in the currencies of the countries that are forced out. So depositors are basically getting a free option.

Financial Planning for the Less-than-Rich

Many Financial Advisors are only interested in customers that have a relatively large amount of investable assets. Some firms cater to the Rich or Super-Rich only and require an account balance of $ 5 million or more. But as the trend to fee-based advice gathers speed there are a number of alternatives evolving that will make it possible to get sound advice with a much smaller nest-egg. Pre-condition will be that the investor is able and willing to do a certain amount of self-education on matters financial. The old say that people spend hours choosing the next washing machine but hardly spend any time on important investment decisions should be a warning.

No Stock Bubble, but Crash may come later

So speaks a 'Celebrity' economist. It is not unusual for market pundits to hedge their outlook in a similar fashion and leaving the hard decision to the investor. Forecasting is difficult - especially if it is about the future. So we have some sympathy for the 'experts' that are constantly badgered by the media to have view on the markets on a daily basis. But investors are well-advised to hedge against any market development by using intelligent risk management when investing for the long term and not be distracted by what is in essence public relations and/or entertainment.

Investors gullible and naive - study

"Delegating responsibility for investment decisions make investors vulnerable to the choices of professionals, choices that may be opaque, shielded from market discipline or tainted by conflicts of interest." A study of investment behaviour illustrates 'terrible investment habits' of American investors and the need for impartial advice.

How does your Adviser rate on investment process?

An article in Barron's magazine raises an interesting point when it argues that individual investors would benefit from an institutional approach to the way their investment portfolios are handled. But quarterly portfolio reviews require a certain amount of sophistication on the part of the investors that may not always be available - apart from the question whether they are willing to dedicate the required time and effort (or whether they possess the minimum of investment skills necessary to do so). So in the end investors are well advised to rely on experienced and trusted gatekeepers when engaging investment managers.

Fee, Kick-back or Bribe?

It literally pays to check (CNBC/Reuters)whether your adviser gets paid for putting your money into certain funds or other investment products.

CoCo's are NoNo's

One would have thought that the main lesson of the Credit Crunch and Financial/Economic Crisis is the danger that can be created by newfangled and little-understood financial 'innovations'. The need for banks to raise additional capital has led to the design of 'Contingent Convertible Bonds' (CoCo's for short). These bonds lure investors with relatively high nominal interest rates that make them appear attractive to those who are desperate to get some positive return on their investments. Even so-called sophisticated investors in large financial institutions get tempted. Partially because they do not play with their own money or they will long have moved on to other jobs or positions when the proverbial s*** hits the fan. They may also not be as sophisticated as their clients (pensioners, mutual fund savers and private clients) assume. It will be interesting to see how regulators treat these securities if they become more of a mainstream investment option. They will have to decide whether their role is to protect the banking establishment or the investors. We know on which side they should be and we are definitely siding with the investors on this issue. Dangerous bets such as CoCo bonds should not be in any investor's toolkit but should be strictly reserved for regular visitors to casinos and betting shops. Not for nothing the link above talks of a ticking time-bomb with respect to these securities.