5 Big Secrets “They” Don’t Want You to Know About Investing

“They” are the institutions of the investing industry. There are a lot of great people in this industry providing excellent value to their clients, but there are pitfalls to avoid in any area, and investing is definitely one of them. I used to work in this industry, so I know how to separate the good information from the bad. Here I share with you institutional secrets “They” don’t want you to know because they make more money keeping you in the dark.

Investing

1) Successful Investing is Not Complicated

Many in the investing industry want to make investing seem more complicated and difficult than it is. That is simply not true. Smart simple investing uses basic asset allocation, and no-load, low expense mututal funds. For your core holdings it is best to consider using index funds since over 80% of mutual funds do not meet their benchmark. By using index funds you’ll be ahead of 80% of mutual funds out there. Then with the rest of your investments you can seek to find “the tops dogs” mutual funds.

I will be covering “How to Invest – A Simple Guide” in detail in an upcoming post. Subscribe here to ensure you don’t miss it!

2) Mutual Funds Are Better Than Hedge Funds

Hedge funds are overrated. There is no secret club whereby when a hedge fund manager enters it, they will have access to higher returns than any other investor. But they will make things sound that way using complex terms to confuse you. The emperor has no clothes. The truth is hedge fund managers still have to accomplish the same thing that any successful investor must do. They must do their homework and pick an investment that will have a return that meets its benchmark. Speaking of benchmarks, they often are not clearly defined.

Search for “Why Hedge Funds Fail” on Google and you will find many stories about hedge funds that “blow up” and about “hedge fund fraud.” Dig a little deeper and you will find some sobering statistics. According to Hedge Fund Street, “Industry estimates show that there are around 9,000 hedge funds controlling up to $1.7 trillion of assets. These funds typically charge 1 to 2 percent management fees and up to 20 percent performance fees. This is much more than that charged by traditional mutual funds.”

Hedge Fund Street also reports, “These hedge funds get paid outrageous amounts of money to produce mediocre returns. Most hedge fund managers don’t even clearly articulate a strategy to clients. They just expect clients to lap up whatever they offer.” This is no secret. And they get away with this because their industry is unregulated. Where’s the protection for the investor? There isn’t any. When they blow up, the investor is stuck with a loss, or in hedge-fund-speak, “a tax write off.” Profits are the goal of investing, not losses. If you want a tax write-off give your money to charity instead.

Usually hedge funds are marketed to rich people who are eager to join a select club about which they can brag to their country club friends. Unfortunately it is a high price to pay for that “special feeling.” And when the fund loses money, rest assured the hedge fund manager will spin a complex answer, aka “tax write-off,” that will have you actually repeating it with pride to your golf buddies. Smart investors, stay clear of these. Losing money is never a good investment strategy.

3) Mutual Funds Are Better Than Financial Advisors

As I stated earlier, there are many great professionals, such as Registered Investment Advisors, who provide great value to their clients. They can save you time, hold your hand during down markets, and encourage you to take action on estate planning. But for most people you can do this yourself and save the fee. With mutual funds you get the best investment managers. You can easily measure progress and compare them against their category peers. This is harder to do with a financial advisor. Not all advisors report returns in a standardized manner.

With mutual funds you can switch between funds with no hard feelings and no hard-sell to keep you as a client. If you have developed a good relationship, it can be hard to “break-up” with your Financial Adviser whose returns are lagging. In fact most people, remain loyal in spite of poor returns, simply because “breaking up is hard to do.”

Instead of hiring an advisor, I will show you how to invest using mutual funds in my upcoming post: “How to Invest – A Simple Guide.” Subscribe here to ensure you don’t miss it!

Should you ever consider hiring an advisor? Yes, if you are not getting the job done yourself because of lack of time, motivation, or knowledge. My suggestion would be to hire an advisor who invests in mutual funds. This way your advisor is purely in the role of helping you with asset allocation, mutual fund selection and maintenance of your portfolio. They usually charge less than Financial Advisors who perform stock and bond selection in-house. This is because you are already being charged an investment fee by the funds. With a mutual fund Financial Advisor you can ask to switch funds if you don’t like the performance without having to sever your relationship with the advisor. Again look for low fees.

4) Stock Picking Is Hard

Brokerage firms are gambling enablers. They want you to believe that you can be a rock-star day trader. You know why? Because even with the discounts they will offer you, they make oodles of money on day traders. I hate to burst your dreams of leaving your day job to trade your 401k rollover, but I am here to help you keep from losing that money. I’ve seen it happen, many times, and it’s not pretty.

Here is what you need to consider. Over 80% of mutual fund managers do not meet benchmark indices. These funds are managed full time by professionals with years of education and training, the most sophisticated tools available, the most up to date research, and 80% of them still don’t beat the index average! With all due respect, do you really think you will be able to beat the indices? Maybe you can, but the odds are against you.

The smart investor strategy: invest your core holdings in mutual funds. If you simply can’t resist the urge to invest in stocks, then follow this guidance:

  1. Start small, just one stock.
  2. Use some type of tool to help you whittle down the universe of stocks from which you will select, such as Yahoo!Finance (free).
  3. Only invest 1-5% of your savings in a stocks to start.
  4. Research it every way possible, the fundamentals and the technicals. If you don’t know what these are, learn them before beginning.
  5. Invest with an eye to a long term holding. Don’t invest for quick profits. Ever heard of Warren Buffett? Long term. It’s the way to go.
  6. Keep a close eye on it. Sell it if it if there are major signs of trouble, such as Enron-style trouble, at which point it will probably be too late.
  7. Wait a whole year before you invest in another stock.
  8. In the meantime, read and learn and perhaps participate in fantasy investing site such as Virtual Stock Exchange.
  9. Books to check out: any from Amazon’s Classic Investment Books selection, especially the top 3.

5) On Cash: Interest Rate Size Does Matter

Why? The power of compounding. Here’s an example to open your eyes.

Example: Right now interest rates on cash vary significantly. Some bank accounts are paying well below 3% and other money market funds are paying over 6% on cash. Many people earn 1% or nothing on their cash. Here’s an example that shows you how much more you could make over 20 years simply by searching for a higher interest rate: (it doesn’t take that much time online!)

In this example, the difference between 1% and 6% is $27,389.08 over a 20 year period! All just for switching to a higher rate!

The lesson here is to make sure you shop for the highest return on your cash possible! What are you earning on YOUR cash?

Here is a link to a Motley Fool article which nicely describes all your cash account options and what different interest rate terms mean.
Here’s a link to find a great interest rate for your cash from Get Rich Slowly.

Conclusion

You work hard for your money. Invest it wisely and avoid these pitfalls. Please Subscribe here to ensure you don’t my upcoming post on “How to Invest – A Simple Guide.”

Please Share!

Please share your comments, experiences, and tips on Investing! All comments big and small are very welcomed!

If you found this post valuable, perhaps you’ll be kind enough to vote for this with a Stumble or Delicious bookmark. Votes are always appreciated!

If you want to Support Life Learning Today, you can visit one of my sponsors, make a donation, or make a purchase at Amazon through one of my links. Thank you!

 

Subscribe

Technorati Tags: , , , ,



Comments

  1. 2
    Tom
    May 26th, 2007 at 4:03 pm

    How can you compare hedge funds to mutual funds? They’re completely different with completely different investors! And stock picking is easy. The hard part for beginners is understanding that you can’t buy a stock without a sell strategy in place.

  2. 3
    AgentSully
    May 26th, 2007 at 9:36 pm

    Hi Tom – Thank you for visiting and taking the time to comment!

    Regarding mutual funds and hedge funds, they are dissimilar in what they can invest in, but they both pool funds to invest in multiple securities for the end client. Yes, it is true many people are not the target market for hedge funds. But the people who are the target market for hedge funds, it is my opinion that they would be better off with mutual funds. I’m sure there are hedge funds that do well, but I would never advise someone to take the financial risk to find out.

    Regarding stocks, I’m glad that stock picking is easy for you. I find it difficult. I measure the level of difficulty based upon how many mutual funds are able to “beat the market” i.e. their benchmark. The fact that 80%+ of mutual fund managers don’t meet the market’s overall return then that tells me that stock picking is difficult for them too.

    You’re right, having a sell strategy is very important. Thank you for pointing that out.

    Hope to see you here again.

  3. 4
    Bob Smith
    May 30th, 2007 at 3:45 am

    Tom says:

    “How can you compare hedge funds to mutual funds? They’re completely different with completely different investors!”

    Sorry Tom, but hedge funds are a poor choice for anyone. Only those who are pretty clueless invest in them.

    Tom says:

    “And stock picking is easy. The hard part for beginners is understanding that you can’t buy a stock without a sell strategy in place.”

    No… it is far, far more complex than having a “sell strategy”. The pitfalls are too numerous to get into here.

    AgentSully has it right. I earned a relatively modest income all my working life and retired a millionaire+ at age 51. With hedge funds and stock picking, I’d still be working.

    I have examined all of this inside and out. The comments in this article are dead-on. Kudos to the author.

  4. 5
    agentsully
    May 30th, 2007 at 10:33 pm

    Hi Bob, thank you for the testimonial! I’ve got a new one coming up soon on the topic of simple investing. I’d be happy to know your thoughts. Watch for it tomorrow. Best regards.

  5. 6
    Hayden
    May 31st, 2007 at 9:57 am

    Interesting points on hedge fund versus mutual fund. I would also note that hedge funds that manage a significant amount of the founder’s capital (Citadel and SAC Capital are 2 big ones) have tended to show consistent superior performance and would be attractive to invest in (in my opinion). These also create a better alignment of interest with the underlying manager.

    The difficulty for investors is that the hedge funds that everyone wants to invest in (such as those just mentioned) are often closed to new investors (and potentially limit or prohibit further investments from existing investors). Hedge funds cannot grow too big otherwise they start to become index-like (a point that Jim Cramer mentioned in his Mad Money book).

  6. 8
    ETF Guy
    June 1st, 2007 at 7:13 pm

    I agree with your philosophy as it matches mine in many ways. Of course, I’m a fan of exchange traded funds over mutual funds, but the differences aren’t huge there. Good to read from another person on “my side”!

  7. 9
    agentsully
    June 2nd, 2007 at 12:08 pm

    Hayden – hi! thanks for dropping by and sharing your thoughts and opinions! Always welcomed! Hope to see you again!

    ETF Guy – hello! yes, ETF are good too. In terms of keeping things simple, I think they are pretty interchangeable. I’ll look into this a little further and write a post on it to clarify things for my readers. Thanks for bringing this up.

    To Everyone: As promised my guide to investing is published. Here is the link:
    http://lifelearningtoday.com/2007/05/31/investing-made-easy-a-simple-guide-free-download/
    Cheers!

  8. 14
    zaki blogjer
    July 13th, 2007 at 10:12 pm

    I have no idea about hedge fund, but I agree that mutual funds is profitable (for me at least) in long run. I have to be patient to get fruitful outcome after few years investing

  9. 15
    agentsully
    July 17th, 2007 at 12:13 am

    Hi Zaki,
    Thanks for joining the conversation! Good luck with your investing!

  10. 16
    Virginia Greg
    July 21st, 2007 at 4:58 pm

    I think I’m kind of backwards on this, but if you have an area of particular expertise, you might be able to know more than the market and pick individual stock (or know who to short). If you’re a drug rep, you might know that a certain company is gaining mind-share of docs before that is reflected in the stock valuation, for example. In those cases, I think you can do really well picking individual stocks. I agree though that mutual funds, as long as fees are 10 year horizon.

  11. 17
    agentsully
    July 22nd, 2007 at 8:06 pm

    Virginia – thanks for sharing your opinion. You could be right. At the same time those “in the know” have to be careful that they are not acting on inside information. And then again, I saw many folks buy based on what seemed like good information only to be foiled by a blind spot in their judgement, which usually took the form of drinking the company’s positive propaganda cool-aid.

    So after that long winded story, that’s why I still recommend mutual funds to everyone.

    If someone is willing to do the research, by all means feel free to try. I wish everyone the best of luck with their investing regardless of how they invest.

    Thanks again Virginia. Hope to see you again!

  12. 20
    Matt
    August 17th, 2007 at 10:47 am

    This is an interesting post that I think does a great job of illustrating that investing can be very simple. By holding a well diversified portfolio of low cost index funds, investors can outperform the majority with little effort.

  13. 21
    agentsully
    August 17th, 2007 at 11:38 am

    Thanks Matt!

  14. 23
    Mike
    November 12th, 2007 at 4:56 am

    Nice post and thanks for the tips. I’ve always wondered what the difference between a hedge and a Mutual fund was and thanks to you, now i know.

  15. 24
    Franklin
    November 26th, 2007 at 8:35 am

    You first point is highly accurate. Invest in index funds and make sure mutual funds are no load. I’d also add that a diversified portfolio and a long term hold strategy make your investment rock solid.

  16. 25
    Phoenix Homes Guy
    January 9th, 2008 at 2:09 pm

    I never really knew about hedge funds and have always wondered what the “big deal” was. Seems to me like their not the secret pill that many make them out to be. Thanks for the sobering stats.

  17. 27
    Shaun Rosenberg
    July 5th, 2008 at 5:31 pm

    You should put the effects of inflation on your chart to give it a more accurate view of buying power. I consider everything that is making under 3% a year is actually losing money every year because of inflation.

    http://www.stocks-simplified.com

  18. 28
    agentsully
    July 9th, 2008 at 8:48 pm

    @Shaun – that is an excellent point. I will add that to the chart very soon.

  19. 29
    milt tomkons
    October 25th, 2008 at 2:35 pm

    great stuff,,, I will quote this in my thesis on hedge fund secrets… 2 great books I found very informative also were Hedge Fund Trading Secrets Revealed by Robert Dorfman and Confessions of a Street Addict by Jim Cramer…. both are riveting if you like behind the scenes stuff

  20. 30
    Stephen Roland
    December 7th, 2008 at 10:30 pm

    I’m glad to see someone else is interested in giving out correct information to the masses!

    Thanks this man!

  21. 31
    Rick interesting
    February 27th, 2009 at 11:00 am

    Well, investing is quite not a complicated matter…as long you know what product you like to invest..do a lot of researching …asking questions from people who have the same products or business you want to invest…and take into consideartion your cash flow.

Trackbacks

  1. neymo.net
  2. Investing Made Easy - A Simple Guide + Free Download
  3. ttiqq.com
  4. Maximum Exposure for your Business or Blog - lifehack.org
  5. Maximum Exposure for your Business or Blog
  6. Solutions for 7 Annoying Modern Day Problems - lifehack.org
  7. 1001 Lists To Read Before You Die | Terabell - technology, law, programming and a laugh
  8. The 1001 list of Quality Reads -- you may want to read before you die
  9. Investments & Loans » Blog Archive » 5 BIG secrets "they" don't want you to know..
  10. #49. Read ‘The 1001 List Of Quality Reads’ « 6ixx

I want to hear what YOU have to say!

blank