Wednesday, April 1, 2009


Types of Investments - How They Make Your Money Grow
By Bruce A. Hoover

Are you trying to decide the types of investments you need to be associated with to make your money grow? Investments tend to fall into three broad categories. This includes cash, bonds and stocks. This is where the simplicity of the subject ends and it starts to get rather complicated from here on. The main reason is each of these broad categories has a number of sub-categories associated with it. This article will focus on the types of investments we think you should be associated with.

Each investment type comes with a lot of knowledge about how to use them effectively. However, you should also take note that the amount of information you need to master for any particular type of investment is directly related to the type of investor you choose to be. You can choose to be an aggressive, moderate or conservative type of investor. While keeping in mind that these investor types also are related to two levels of tolerance of risk. That is low risk and high risk.

Investors that consider themselves conservative investors tend to invest in cash. There investment decisions usually have them investing in Certificates of Deposit, Treasury Bills, Mutual Funds, Money Market Accounts and interest bearing savings accounts. The main idea is that these investments are the safest available while still being able to grow over a long period of time.

The Moderate type of investor will usually involve themselves in bonds, cash and a little stock trading. Their main point is to keep risk to a moderate to low level. Moderate investors may also find themselves investing in low risk real estate.

The Aggressive investor tends to concentrate the vast majority of their investing time and effort directed at the stock market. There investment portfolios can also include higher risk real estate and business ventures. There main motto is simply buy low and sell higher. Of course by including more riskier investment options into their portfolio they have to balance risk and reward to a much greater degree then the other two types of investors.

We would suggest that before you get your big investment plan started that you understand the various types of investments available to you and their associated risk and reward characteristics.

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Lessons From the Tom Petters and Bernie Madoff Scandals
By Keith Tufte

Tom Petters (alleged) investment scheme is estimated to have cost his investors $3 billion in losses. Bernie Madoff's $50 billion Ponzi scheme has just blown up over the past few weeks. The $50 billion Madoff losses are the largest fraud-related investor losses in history by a wide margin. What lessons can investors learn from these recent giant fraud schemes to protect themselves in the future so they aren't duped as well?

1. If it sounds too good to be true, it probably isn't true. Returns that are well above the market or that are amazingly consistent through any type of market demand lots of questions. Be skeptical. Petters was supposedly promising some investors big returns every 90 days. That is just not realistic and doesn't make common sense. Why didn't he just give investors a steady 12% return per year (or borrow at 6%-8%) and keep the rest for himself if it was such a great business/investment? Madoff supposedly produced equity returns that were amazingly consistent at +1% per month regardless of how much the stock market rose or fell during the month. Again that's too good to be true.

2. Don't chase returns. You are likely late if you are chasing great recent historical returns.

3. Risk is always highly correlated to returns. There is no free lunch. Be wary of guaranteed returns and/or promises of above market returns. If your manager is producing great above market returns, he is probably taking above average risk to get there. Be skeptical.

4. Wealthy people are often not any smarter or more ethical than regular people. Both of these investor frauds had lots of wealthy, smart people and companies as investors. Greed is a universal emotion that may even be stronger for wealthy people. The more you have, the more you want even more. Sometimes the rich are the "dumb money".

5. Trust, but verify. Ronald Reagan said it best. Some people who did their homework on Petters and Madoff decided not to invest. Get verification from third parties, referrals, background checks, brokerage statements from an un-related custodial brokerage firm. Do your due diligence to check things out or have an advisor you trust do it for you.

6. Beware of conflicts of interest. Petters was paying his associates million dollar bonuses to keep them happy and going along with the scheme. Bernie Madoff had his sons working for him and his brother-in-law was his accountant. Madoff owned the investment firm and the brokerage firm that was doing all the trades so it was much easier to fudge the numbers. Is the financial incentive of your investment manager/advisor aligned with your interests? Always? Ask the question.

7. Make sure your investment manager is using a separate, independent, and well-known broker/dealer as the custodian for your assets. Make sure your assets are at a custodian firm who is independent of the investment manager. Is it a custodian firm you have heard of? Madoff owned and ran both and therefore there was no outside party to verify things. The fox was guarding the henhouse. Madoff's client statements did not come from an independent custodian such as Fidelity, Schwab, or TD Ameritrade. They were from Bernard L. Madoff Investment Securities, LLC. Madoff himself controlled what the statements said. Did Petters even use a custodian? Make sure you get regular statements from the independent custodian investment firm, not just from your investment advisor.

8. Never write checks or send deposits directly to your investment advisor. They should be written to the investment advisor's firm or preferably directly to the custodian firm that is holding the assets.

9. Diversify. Don't put 100% of your investment in one hedge fund strategy like many Petters and Madoff investors did. They likely did this because they were getting such great returns (for a while) there. Now they are completely wiped out.

10. Watch your risk levels. Again many investors had most or all of their money invested with just one hedge fund strategy (Petters or Madoff). That is too risky for any investor.

11. Get your investment agreement in writing. It is smart to have an Investment Policy Statement (IPS) that outlines your investment strategy and parameters in writing. You should also have the investment agreement between you and the investment manager in writing.

12. Hedge funds can be risky. They are mostly unregulated, often secretive, expensive, and usually not transparent. You often don't know how much risk they are really taking.

13. Don't invest with a money-manager just because of their reputation. Check them out. Do some due diligence. Understand their strategies and make sure they make sense for you. Business success and social prominence doesn't ensure safety or soundness in investments. They also don't ensure the highest ethical standards.

14. Use common sense. Did it make sense that Petters could buy electronics from Sony and then sell it to Wal-Mart and make big returns? I don't think so. Wal-Mart is a smart company with big buying power and smart purchasing agents. Petters was in some of the toughest businesses in the world (electronics, airlines, Polaroid) and was supposedly making huge money in them? Madoff made 1% each month in stocks when the market was down big or up. Does that make sense? How can he do that? Ask the questions.

15. Don't invest in things you don't understand. This is one of the best rules of investing. You should understand the structure of the firm you are working with, the investment philosophy, and the investment process. I'm sure most of Madoff's investors had no idea what his "split strike conversion" equity strategy was. How many investments do you own that you don't understand?

16. Avoid "secretive" and "unusual" investment strategies and managers. Demand transparency. Ask lots of questions. Read through your brokerage statements carefully to make sure you understand what is going on. Petters and Madoff were both secretive about how they were producing these great returns and discouraged investors from asking about their "proprietary" strategies. Madoff would toss investors out who asked too many questions.

The Petters/Madoff scandals are another reason for investors to lose confidence and trust in the financial markets. Most investment advisors and money managers are good and honest people.

Keith Tufte
Longview Wealth Management, LLC.

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Keith Tufte - EzineArticles Expert Author


Is Now a Good Time to Invest?
By Nicholas Swezey

The right time to get back in the market may be just around the corner. With global economies sinking, sometimes dramatically, it can be a scary thought to put your hard-earned money on the line. However, a smart investor will realize that golden opportunities are appearing if proper research is done.

If you look at a long-term chart of the Dow Jones average, you will see that it is currently at some of the 2002-2003 levels. It has dropped dramatically since the financial collapse of 2008-2009, but it is still in familiar territory. It may take another two years or more for a large upswing in the markets, but at least we hope that the Dow will not drop below 7,000 points. That may bring hope and some peace of mind about starting to invest again.

Dollar Cost Averaging

The concept of Dollar Cost Averaging comes to mind in the current market situation. It is the process of buying stocks or similar investments on a regular basis, such as once a month, using a fixed amount of money. When prices are low, you are able to buy more shares. When prices are high, you buy fewer. In this way, you are able to take advantage of temporary low prices. This is especially helpful for long-term investments, such as retirement accounts. It may go against human nature to buy stocks when everything is falling and red but in fact it can lead to a bigger payoff if done correctly.

Don't Wait Too Long

As soon as you believe the markets will not drop much more, that is the time to start investing. When an upswing begins, it may happen so fast that you will miss a good portion of it. There are literally billions of dollars of cash on the sidelines, just waiting to go back into the market when the time is right. You can imagine what impact that might have on prices because of a surging demand but limited supply of stocks and mutual funds. Don't wait too long!

Which Companies to Buy

There are a lot of low-priced stocks right now. Don't jump into any old stock just because the price is low. There may be good reasons for it, such as the company being dangerously close to bankruptcy. One popular example is GM. Their stock price has dropped incredibly far. Is it a good deal? The government will probably not allow them to go into bankruptcy because that could have catastrophic affects on the country. Even if they survive, though, they may not thrive, and the stock price might hold its value or drop even more. Nobody can predict the future of GM. This is just an example of how difficult it can be to make a trading decision at the present time.

You also need to consider how the company is adapting to the economy. Are they offering low-price items to their customers? Are they reducing expenses significantly, such as layoffs, to stay in business? Do they have access to enough credit to stay operational? These are very important questions to consider before making a trade.

Will the Economy Get Worse?

This is probably the single most important factor that traders are considering right now. Why put your money into investments if they are just going to drop again? The government is trying hard to stabilize the economy, but there are many experts who believe there is more doom and gloom in the future, with more foreclosures, bank failures, and lost jobs on the way. A lot of this depends on how the government handles the situation and how the public perceives their actions. If the public believes things are stabilized, they will begin to spend and invest again, businesses will have more money and they can hire more people, and the economy can begin to thrive again. When this will happen, nobody knows for sure. Hopefully in 2009 it will, but it may be 2010 or later.

Nicholas Swezey helps people learn about Day Trading on his site,

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