When I was approached by someone so called financial professional at Brokerage Services LLC, I was somewhat intrigued by the title. She claimed that she was a financial advisor registered representative in PA, who does investments. Initially, the title made her seem legit, but after some digging, I realized, I was dealing with a glorified sales person. I’m not a fan of the commercial investment industry as a whole. Yes, there are a few, and I mean very few diamonds in the rough. But, 99.9% of all investment advisors have absolutely no business managing your money and they amount to a gloriﬁed salesman/saleswoman masquerading as a ﬁnancial investing expert. YOU and you alone have the best interests of your ﬁnancial future in mind. When you really break down the relationship of a ﬁnancial advisor and the client, the harsh reality shows that often a ﬁnancial consultant’s job is to make their ﬁrm and themselves wealthy. I asked her how much she is making at her current brokerage firm in King of Prussia, and she was reluctant to reveal her income. However, after some prodding, she reveal to me that based on hard work/long hours, she could make anywhere between $24,000 to $42,000 dollars a year based on how much she sells the investment(s) to insurance(s).
Can you trust her?
Before hiring any financial advisors, go read “How to invest” here
Then, drink one less beer a week, save few bucks by quitting smoking, and use this money to invest letting your money grow while you sleep at night. Let me give you some breakdown on investment 101 from Ramit Sethi’s book, “I will show you how to be rich.”
When you buy stock, you buy shares of a company. If the company does well, you expect your stock in it to do well. When people talk about “the market,” they’re talking about a collection of thirty large-cap stocks – the Dow Jones Industrial Average Index. The S & P 500 is another index of 500 stocks.
Overall, stocks as an entire category provide excellent returns. As we know, on average the stock market returns about 8 percent per year. Stocks have been a good way to earn significant returns over the long term, but stay away from picking individual stocks, because it’s extremely difficult to choose winning ones on your own. The tricky thing about stocks is you never know what will happen. Even professionals whose livelihoods depend on it can’t predict stock returns. If these experts – who devour annual reports and understand complicated balance sheets – can’t beat the market, what chance do you have of picking stocks that will go up?
You have very little chance. That’s why individual investors like you and me should not invest in individual stocks.
Bonds are essentially IOUs from companies or the government.
- Technically, bonds are longer-term investments of ten-plus years.
- CDs involve lending money to a bank.
- Both above are very similar, hence the term “bond” is used here
If you buy a one-year bond, it’s the same as if the bank says, “Hey, if you lend us $100, we’ll give you $103 back a year from now.”
The advantage of bonds are that you can choose the term, or length of time, you want the loan to last (two years, five years, ten years, and so on), and you know exactly how much you’ll get when they “mature” or pay out. Also, bonds, especially government bonds, are generally stable let you decrease the risk in your portfolio. See, the only way you’d lose money on a government bond is if the government defaulted on its loans – and it doesn’t do that. If it runs low on money, it just prints more of it.
But because bonds are such a safe, low-risk investment, the return – even on a highly rated bond – is much lower than it would be on an excellent stock. Investing in bonds also renders your money illiquid, meaning it’s locked away and inaccessible for a set period of time. Technically, you can withdraw early, but you’ll face severe penalties, so it’s a bad idea.
In general, rich people and old people like bonds. Old people like them because they like to know exactly how much money they’re getting next month for their medication or whatever it is they need.
- Old people, some of these grannies and grampies can’t withstand the volatility of the stock market because they don’t have much other income to support themselves and/or they have very little time left on this earth to recover from any downturn.
- Rich people, on the other hand, tend to become more conservative because they have so much money. Put it this way: When you have $10,000 you want to invest aggressively to grow it because you want to make more money. But when you have $10 million, your goals switch from aggressive growth to preservation of capital. You’ll accept lower investment returns in exchange for security and safety. So guaranteed bond at 3 percent of 4 percent is attractive to a wealthy person – after all 3 percent of $10 million is still a lot.
In investing terms, cash is money that’s sitting on the sidelines, uninvested and earning only a little money in investing from money-market accounts, which are basically high-interest savings accounts. Traditionally, cash has been the third part of a portfolio beyond stocks and bonds. You want to have totally liquid cash on hand for emergencies, and as a hedge if the market tanks. Of course, you pay a price for this security: Cash is the safest part of your portfolio, but it offers the lowest reward. If you factor inflation, you actually lose money by holding cash in most accounts.
Since cash offers the lowest reward, I have listed three vehicle(s) for you to choose to invest your hard earned money:
- More convenience
- Less control
- More predictable, returns over the long term
INDEX FUNDS / MUTUAL FUNDS
- Somewhat convenient
- Can be low fees (index funds) or high fees (many mutual funds)
- More control than lifecycle funds, less control than stocks/bonds
- Returns are fairly predictable over the long term
STOCKS / BONDS / CASH
- Individual stocks and bonds are very inconvenient to choose and maintain
- High Control
- Stocks offer extremely unpredictable returns that typically fail to beat the market
Bonds offer extremely predictable returns, but on average return less than stocks.
CASH offer nothing except lose value in the long run.
Individual stocks are nightmare. Essentially investing on individual stocks are gambling at best. Even experts can’t beat the market. Regular people like you and I, forget it!
Savings Account/money market is slightly better than cash, but offers very minimal return(s) and you will still lose value based on inflation percentage(s).
Warning sign(s) for hiring financial advisor(s):
1. An investment advisor that promises to be a jack-of-all trades with investment advice, tax planning, insurance, and a car wash when you leave is the ﬁrst red ﬂag of a ﬁnancial advisor that has absolutely no clue how to achieve substantial investment returns. Financial advisors that claim to be a one-stop-shop usually do this to make up for their lack of expertise and knowledge of any one subject.
2. Your investment advisor is not a car dealership. You donʼt take your money in for a quick wash and tune-up. This type of ﬁnancial advisor will attempt to emphasize their “superior client service” and a lot of other fluff talk. Most often, these advisors try to cover up their sub-par understanding of investing by discussing service and will mostly like put you into traditional blue-chip but expensive service fees mutual funds, let it ride in the open market, and move onto the next client to engage in more asset gathering.
3. The investment advisor mentions the words “diversiﬁed” or “mutual fund.” Both of these words hint at the traditional investment paradigm of diversiﬁcation. The concept of diversiﬁcation (in the traditional sense) was born out of ignorance of ﬁnancial consultants, but more importantly, affords them the time to pursue the main objective of gathering assets to maximize fee-collection. In the investment sense, “diversified” is really good to use if you know “how” to diversify your money. More or less, financial advisor(s) will make you invest in mutual fund since it is by far the highest fee-collection vehicle for the brokerage firms. Not a good solution for investment strategy.
Stay tuned for Part 2 on investing 101. Choosing right investment strategy will be the focal point of Part 2. -SjC