Category Archives: investment tips

Investment Pitfalls – Taking Friends’ Advice

Posted on March 31, 2012 by admin

One of the biggest investment pitfalls is taking some bad advice from a friend.  Whether the advice is on a great mutual fund they just found, or a hot stock that is “sure to explode,” the friend is just trying to pass on knowledge that they have recently learned.  All too often though the end result is that the friendship is damaged, and both parties end up losing money. Nearly everyone has the friend that feels that since they have been investing for a few months now, they are experts.  They may be the first in the group to start setting money aside, or they may be a more adventurous investor.  However it comes about, they want everyone to copy exactly what they have done for two reasons.  They want to make sure everyone praises them when (if) they get rich quick, and they want to make sure they are not the only ones that lose out if something goes wrong.  So when they find a great mutual fund, low cost insurance, or a hot stock, they share it with friends.  The smartest thing the friend can do is to do plenty of research before jumping in. It is too easy for a friend to suggest a specific mutual fund, hot stock or even an insurance policy without knowing the details of your specific financial situation.  While most of us will invest in mutual funds , not all mutual funds are right for all people.  Some mutual fund companies charges fees that are too high, and subsequently the investor loses out on some of the return they should be seeing, or they charge too l of fees and the fund underperforms.  A hot stock could explode, but more than likely it will flounder along, and too often it fails completely expiring worthless.  Insurance companies that are in financial trouble will offer teaser rates, but after the initial period is up (usually 6 months or 1 year), the rates skyrocket leaving the buyer to go out shopping once again. Personally I have experienced these pitfalls myself, and been the culprit.  I found a great stock that was sure to explode and convinced a friend to invest.  Neither of us got a penny back on our investment.  I visited an insurance broker (someone in the industry who is supposed to be honest), who convinced me to go with the cheapest insurance company.  A year later when I received policy renewal notice my rates had gone up more than 20%. To avoid these pitfalls it is imperative that the investor their own research before they put their money in a company.  Look at the fees associated with the mutual fund, look at the performance history, research the company issuing the stock, and find out if the insurance company has a good financial strength record, or history of raising rates.  Chasing hot stocks usually ends in losing money, so stick with well-diversified, low-fee mutual funds that track the market.  While not as exciting, it is the safer way to go. You may even decide to find a trusted advisor who is regarded in the community as being honest and putting their clients’ needs first. Continue reading →

Posted in Insurance, investment pitfalls, investment tips, Loans and lending, Mortgage Rates, Savings & Investment, savings and investment | Tagged , , , , | Leave a comment

Fixed Income Investment Yield Shopping: the Most Expensive Shopping You’ll Ever Do

Posted on December 8, 2011 by admin

In an environment of what seems a perpetually low interest rates, what is an investor looking for income to do? A recent cover story in Barron’s Magazine “How to Get Safe Annual Payouts of 7%”  illuminates some of  today’s challenges in the fixed income investment world and offers that “Yields of 5% and 7% are attainable, but you have to look globally and across asset classes that may seem unfamiliar, such as emerging-market bonds, global infrastructure stocks, master limited partnerships and mortgage real-estate investment trusts.” To be sure the author adds that while “some risks are obvious…more often risk is difficult to spot.” After more than twenty years in the finance and investment arena, I feel compelled to add:  Caveat Emptor. I am continually amazed at the number of investors who only ask one question when it comes to potential fixed income investment selections:  What is the yield?   What I am even more amazed at is the response if the yield does not meet an investor’s perceived needs. Worse still, many fixed income investment proponents are over allocated to just one or a few holdings, as they have been taught to avoid bond mutual funds. Income investors need to keep the perspective that for every $100,000 invested a full percentage point yields an extra $1,000 per year.  On a monthly basis that works out to $83 a month. While I have no way of quantifying it, I would venture to say that an exponentially greater amount of money has been lost than gained when reaching for incremental amounts of yield. For some recent examples just Google the following: Ultra short bond funds, Auction Rate Preferred Securities and the First Reserve Money Market Fund. Even more horrifying is that these disasters occurred when investors/money managers were reaching for maybe an extra 25 basis points of yield.  So for every $100,000 the extra risk (which proved ruinous) brought in about $20 a month. Income investors should ask themselves the same thing all investors should ask.  What is the potential total return in relation to the risk? For investors who have to have the income to pay the bills, it may be better to drawdown a small portion of principal than to risk a bigger chunk of it in hopes of higher yield. Absent the stomach to drawdown some principal, the fixed income investor needs to be sure that he or she is utilizing a prudent allocation to higher yield (and risk) investments. This may require the use of a bond fund, but as I discussed in “Bond Ladders vs. Funds,” here it just might be the best option. Continue reading →

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