Facebook — How Not To Invest in the Stock Market
Despite predictions that its stock would soar on its first day of trading, Facebook was a big fizzle. In fact, Facebook’s underwriters struggled to keep the price from plunging through the initial offering price of $38 to avoid a huge embarrassment (note how the price flat lined at $38 starting at ~3:30pm on Friday, 5/18/12).
Despite widespread belief to contrary, buying a stock because you know the company or “feel good about the company” is no way to invest. This kind of thinking can be very dangerous to one’s financial health. Moreover, this approach is usually coupled with a strong emotional attachment that causes investors to hold onto that company much too long once the share price begins to deteriorate.
Warren Buffet once said, “You may have all these feelings about a stock, but a stock doesn’t know you own it. It doesn’t care what you paid for a stock.” It’s wise to use your head, not your heart, to keep emotions from corroding your investment discipline.
Leveraged and Inverse ETFs — Most Investors Should Avoid Them
Leveraged and inverse ETFs are difficult to understand and are not a good fit for long-term investors.
Exchange-traded funds (ETFs) trade daily on exchanges like stocks. Leveraged versions use complex futures and derivatives to amplify the daily returns of an index, often times trying to double or triple the return. Inverse ETFs strive to return the opposite of the index.
When ETFs are held for longer than a day, the effects of compounding can produce results that vary significantly from the one-day outcome. This makes leveraged and inverse ETFs unpredictable and risky to hold for longer periods.
Citi, Morgan Stanley, UBS and Wells Fargo are paying $9.1M to settle allegations on leveraged ETFs. These banks were fined $7.3 million and they agreed to pay $1.8 million in restitution to some customers who were sold leveraged and inverse ETFs. Industry regulators allege the banks sold billions of dollars of these volatile investments without properly assessing their risks and whether they were suitable for retail customers. (“Retail” customers are individual investors versus “institutional” investors like pensions and hedge funds).
The Financial Industry Regulatory Authority (FINRA) and the Security & Exchange Commission (SEC) have previously warned the investing public about the risks of leveraged and inverse ETFs, particularly for those investing for the long term.
“Stock-Picking Robot” — Really?
A pair of 21-year-old twin brothers (Alexander and Thomas Hunter) from the UK duped thousands of investors in the US into believing that a fictitious “stock-picking robot” could find penny stocks set to surge in price.
According to a lawsuit from the SEC, approximately 75,000 investors paid a total of $1.2 million for a newsletter subscription and home “robot software”. The Hunter twins used the newsletter and fake software to feed spurious stock tips to unwitting investors in a “pump and dump” scheme. The Hunters were also paid by companies to tout specific stocks.
The lessons here should be obvious. Lots of people
- Want to get rich quick
- Think investing has some magic bullet or secret formula for success
- Are essentially and critically uninformed about the markets
- Desperately need help with their investing and financial planning
If it sounds too good to be true, it probably is. If in doubt, seek the expert opinion of a competent, professional, and ethical investment advisor.
Temperament over Intellect
Warren Buffett once said, “The most important quality for an investor is temperament not intellect.”
Investors very often buy at high prices when the market is hot and attractive, and sell at low prices after observing periods of poor performance.
This leads average investors to severely trail both the S&P 500 index and the Barclays Aggregate Bond Index over long time periods. This is why investors are very often their own worst enemy.
CBS MoneyWatch author Larry Swedroe recommends in a recent article that you ask yourself if you believe that you’re best served by being your own advisor:
- Do I have the temperament and the emotional discipline needed to adhere to a plan in the face of the many crises I will almost certainly face?
- Am I confident that I have the fortitude to withstand a severe drop in the value of my portfolio without panicking?
- Will I be able to re-balance back to my target allocations (keeping my head while most others are losing theirs), buying more stocks when the light at the end of the tunnel seems to be a truck coming the other way?
“Shelf-Space” – Another dirty little secret about big brokerage firms
Cereal companies pay grocery stores to place their products at eye level on the shelves. Higher visibility leads to higher sales.
Mutual funds do the same thing. They pay big brokerage firms big money to tout their products. So when you call up a firm like UBS or Morgan Stanley Smith Barney and ask for an investment recommendation, they have a list of preferred mutual funds that they want you to buy so they can make more money.
These “revenue sharing” payments can be very big revenue sources for brokerage firms. For example, nearly one-third (33%) of Edwards Jones’ $481.8 million profit in 2011 came from “revenue sharing” fees. Note that Edwards Jones is forced to disclose more information on sensitive matters like this than its competitors thanks to a 2004 regulatory settlement.
Though “revenue sharing” payments are legal, many critics question if they are ethical since it calls into question whether recommendations are based solely on what’s in the best interest of the client. Brokerages are not fiduciaries and have no requirement to put client’s interests first.
“It’s an unholy alliance between mutual-fund firms and brokerages to exploit their customers,” says John Freeman, emeritus professor of business and professional ethics at the University of South Carolina Law School.
Investors who want to avoid questionable practices like “shelf space” and “revenue sharing” should seek advice from a fiduciary such as a registered investment advisor.
source:
Wall Street Journal: Brokers Raise Fees, but Not For Investors: Why You Should Care
2011 IRA Contribution Reminder
Here’s an important reminder if you have an individual retirement account (IRA) or are considering opening an IRA.
2011 contributions to your IRA accounts can still be made up through April 17th.
Maximum Annual Contributions (IRAs and Roth IRAs only):
• $5,000 for tax year 2011
• Age 50+: Catch up contributions of an additional $1,000
Complex Annuities See Surging Sales ~ Investors Should Beware
An “indexed annuity” is a complex, high-cost, and illiquid financial product. They pay interest based on the performance of stock and bond market indexes. Insurers guarantee buyers will not lose their principal, but they require investors to lock-up their capital for long periods, often more than a decade.
Indexed annuities are very popular with insurance salespeople because they are a high commission product. Insurance agents can get an up-front payoff of 12% or more of the invested amount simply by making the sale. The accompanying chart demonstrates the sales of indexed annuities have surged in the past decade.
Investor protection agencies and authorities are very concerned about abuse and fraudulent activity around annuities sales. Former California insurance commissioner Steve Pozner warned that agents “who steal from vulnerable seniors will not get away with their shameful tricks.”
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