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.
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.
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 donâ€™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.”
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:
- Start small, just one stock.
- Use some type of tool to help you whittle down the universe of stocks from which you will select, such as Yahoo!Finance (free).
- Only invest 1-5% of your savings in a stocks to start.
- Research it every way possible, the fundamentals and the technicals. If you don’t know what these are, learn them before beginning.
- 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.
- 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.
- Wait a whole year before you invest in another stock.
- In the meantime, read and learn and perhaps participate in fantasy investing site such as Virtual Stock Exchange.
- 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.
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