In my last posting I began a series designed to show you how to spot the bad folks in the investment world (my business). Iâ€™ve rounded up the usual suspects into 3 categories: People who lie, cheat, and steal; People who act recklessly; and People whose judgment is clouded by conflicts of interest. Last week we covered the liars, cheaters, and stealers. This week, letâ€™s look at the reckless.
Reckless behavior is hard to spot because it often looks like youâ€™re involved with someone who is on top of things. These people really do believe they are doing right by you. However, donâ€™t expect much from them when a bunch of your money goes down the drain. Letâ€™s look at an example.
During the lateÂ â€˜90s an advisor had shifted a lot of his clientsâ€™ money into technology. Like the rest of the world, he was as caught up in the hype of Internet riches. When things started going south he â€œknewâ€ that it was a buying opportunity, so he shifted more of his clientsâ€™ assets into tech. When tech plummeted, he margined his clientsâ€™ accounts to buy even more tech. In essence, this allowed him to buy more of these stocks using borrowed money. Money borrowed on his clientsâ€™ behalf. When the smoke cleared, losses were about all that remained.
This also points to why it is sometimes difficult to discern reckless from prudent behavior. After all, I regularly tell folks that the key to investing is to buy low and sell high. When the market has crashed, it sure ainâ€™t high. Thatâ€™s why in late 2008 we shifted some client money from the bond side to the stock side of their portfolios. Why isnâ€™t that as reckless as the Â â€˜90s advisor?
Hereâ€™s why: The ’90s advisor shifted from having a bunch, to having most, to having over 100% of the clientsâ€™ money in a single slice of the market. That over-extension, as well as â€œall eggs in one basketâ€ decision is the key. No matter how good something looks it can go down. No matter how far it has gone down, it can go down some more. (Okay, if it hit zero, it will probably stop.)
Another area of recklessness is the advisor who is all excited about a new type of investmentâ€”one they know little about. You see, most people in my business donâ€™t spend their days researching the markets, learning about new statistical analysis techniques, or reading those boring prospectuses. They spend their days selling. Now, that is a part of the businessâ€¦one that if ignored will have themâ€”and meâ€”go belly-up. But someone in the organization had better be vetting all the new-fangled investments that come out every year.
So, when something youâ€™ve never heard of before is offered to you, especially if it seems like it solves all your problems and has a cherry on top (like much tech in the â€˜90s), be wary. Often the person presenting it to you really doesnâ€™t understand what heâ€™s sellingâ€¦but is just repeating what a wholesaler told him. Since a wholesalerâ€™s job is to get the agent or broker representative to sell the product du jour, it is quite possible that they emphasized only the good and none of the bad. Sure, the risks are listed in the product literature somewhere, but when it goes unread by an advisor, their decisions turn reckless.
Â Gary Silverman holds the Certified Financial Planner (CFPÂ®) license and is a member of the Financial Planning Association (FPAÂ®). Gary is the founder of Personal Money Planning, a retirement planning and investment advisory firm. Find out more about Personal Money Planning at the company website or follow on Facebook.
Views expressed are the personal views of the author, and do not represent the views of the National Foundation for Credit Counseling, its employees, its members, or its clients.