First, a disclaimer: I am neither a financial advisor nor an attorney. My posts are merely reflections of the experiences I have gained as an investor since the year 2000. Before you take any investment actions based on information contained within this and/or any future posts, please consult with a Certified Public Accountant; a fee-only, fiduciary-bound Certified Financial Advisor; and/or an attorney who is an expert on the specific investment instrument that you decide to pursue. You are responsible for your own financial destiny.
If you don’t understand it, don’t buy it
That’s much easier said than done. In my inaugural post on investing in July 2012, I explained why I eventually took all of my savings out of Wall Street. Whether you invest inside or outside of Wall Street, the topic of fraud applies to all investors. After all, it is people that handle the money. When it comes to handling money, there are three major elements that impact the outcome:
- Who is handling the money? You or someone else?
- If it is someone else, is the individual honest or dishonest? How do you know?
- Those who con others look and speak like the most honest people you would ever meet. That’s how they get away with the crime they commit.
- What is the knowledge level of the person handling your money? High, medium, or low?
Given these elements, what are the best- and worst-case scenarios and their respective outcomes?
- The best-case scenario: Financially-knowledgeable people handling their own money – and achieving a satisfactory return on investment consistently over an extended period of time.
- The worst-case scenario: Dishonest people handling other people’s money – and defrauding them of their life savings.
For most of us, the situation falls somewhere in-between these extremes. The problem for most people is that they do not have the time or the energy to understand their own investments. They have a family, they work, and they have other obligations. I’ve been there myself – so I completely understand why they ignore their own investments. Having lost hundreds of thousands of dollars in the market – primarily in 401(k), no less – I wish someone had told me, repeatedly, to “IGNORE YOUR INVESTMENTS AT YOUR OWN PERIL.” Hopefully, you can prevent what had happened to me from happening to you by making the time to pay attention to your own investments. Above all else, if you don’t understand it, don’t buy it.
Financially-knowledgeable people, too, can be defrauded
It’s easy to see that fraud can happen with those in the worst-case scenario. But how is it possible with those who are financially knowledgeable? As it turns out, financially-knowledgeable people tend to let their guard down when, for instance, everyone else around them – whom they trust to be knowledgeable and financially savvy – is investing in a particular investment program. As a case in point, many of the investors who put their money with Madoff were sophisticated investors.
In a free society, whether you’re investing inside or outside of Wall Street, whether or not “the nice people you meet” intend to defraud you, it is your responsibility to know how to protect your money. Therefore, it behooves you to educate yourself. I highly recommend that you watch this short clip from the Tricks of the Trade: Outsmarting Investment Fraud. It is a preview of the hour-long DVD being made available to the public for free – if you ask for it – by the Financial Industry Regulatory Authority. FINRA is the largest independent regulator for all securities firms doing business in the United States. If you are highly educated in finance, you may assume that no fraudster could harm you. If this is you, be forewarned – humility may serve you well. The same website by FINRA also offers a number of other educational materials on money and investing. The only cost to you is your time.
In future posts, I will assume that you have reviewed the FINRA website (including the DVD) and, therefore, know how to protect yourself from fraudsters.
What topics – in terms of investing outside of Wall Street – would you like me to cover in my future posts? I would welcome your comments, questions, and requests.
Coming up next month
Investing outside of Wall Street – beware of the so-called “gurus.”
