Often times, whether it be with investing or in life, we all fall victim to believing a non-truth. Perhaps it was through a misinterpretation of the facts, or a misunderstanding altogether. These things happen, but we can all better ourselves and those around us by exposing the facts. This week, we wanted to take a moment and go through a few of the most prevalent non-truths in the world of economics and investing.
Investors can diversify themselves away from risk
As many of our readers now, we use an economic based system for managing money; we allocate funds based on what the economy as a whole is doing. Unfortunately, many investors believe that they can buy a ratio of x stocks to y bonds while hedging z to make themselves invincible from loss. If 2008 taught us anything, it is that there is always inherent risk, even if it is not apparent. The best thing that an investor can do is to allocate their funds in a style that they are comfortable with, that they agree with, and that will let them sleep easy. There is always risk in the markets; the question a client needs to ask is how much of that risk can they tolerate?
Regulators such as FINRA and the SEC exist to protect the consumer
Many individuals feel a sense comfort knowing that there are regulators at both the state and local level that oversee advisors and brokers to make sure that they are following the rules. Back in the days before FINRA existed and we had the NASD, this was truer. Regulators wanted to make sure that firms were in compliance and ensure that they were not hurting the client. Sadly, that is not the environment that we live in anymore. Regulators care more about levying fines and penalties for ridiculous clerical errors as opposed to making sure that the clients are protected. The SEC has been called out in court for operating more like a strong arm division of the federal government to extort money from firms than a client protection agency. Regulators care solely about writing new rules and levying enough fines and penalties to pay for the real estate that they occupy in Washington DC, Chicago, New York, etc. In this day and age, it is imperative that investors and customers ask the right questions and do a bit of due diligence on their own.
Seminars exist as a free opportunity to gain new knowledge
I want to preface this segment by saying that there is absolutely nothing wrong with seminars or forums. We have done them before and will do them again, however investors need to know the exact purpose of these events. We have a tremendous amount of respect for those who hold seminars open to the public to educate individuals on economics and finance, but the real purpose of a seminar is to make a sale. When investors attend these events, the firms sponsoring them are interested in gaining you as a client, plain and simple. This can be great not only for the firms hosting them, but for the individuals attending. At the very least, the attendee gets a piece of advice and a free meal, and if they enjoy what the hosting firm has to say, it could be the start of a long term business relationship.
There are an infinitesimal number of misconceptions regarding this industry, but these are some of the more common ones. What it all boils down to is the responsibility of the client. In a perfect world, an investor could take their nest egg to any of a multitude of advisors, everyone would be charged the same amount, earn the same returns, and we would all live happily ever after. The sad fact of the matter is that we live in an imperfect world, and the client must to ask the right questions and do the proper research to protect themselves, or else they may find themselves in a bad spot down the road.