Recently, we spoke with an investor who unfortunately invested with a stockbroker who targeted widows, elderly, and unsophisticated investors and pushed them into high-fee, high-risk alternative investments. While we won’t name names, this now former broker is standing trial for criminal fraud, which started in January 2020.
The investor’s money was placed in investments designed for sophisticated investors. The broker lied about the investor’s net worth and risk tolerance to make it seem the investment product was suitable for their goals. In fact, these “investments” were highly speculative and ended up losing the majority of the investor’s retirement savings. Meanwhile the broker earned significant commissions.
Situations like this are extremely uncommon, but they can happen, albeit, maybe not to this extent. Henssler Financial is a firm that was founded in education. Our decisions are backed by long-term historical data and academic studies. While past performance is not indicative of future results, we believe history rhymes, not repeats. Although our economy has changed since the creation of the New York Stock Exchange in 1817, it has not changed so significantly that Large Cap equity returns significantly differ from their long-term historical rates. We’ve always said that we cannot predict what will happen in the next 12 months, but we can give you a good idea of what will happen over the next 10 years.
First and foremost, you need to know that all investments carry risk. Generally, the higher the reward, the higher the risk. You want to find the balance between risk and reward that works best for your situation, so we recommend you follow the money.
Start by understanding what risks are involved. If an investment is promising a high return, consider what you are giving up. Ask yourself, “If the investment promises to grow my money tenfold, how great are my chances to lose money?” If you can’t afford to lose money, then this type of investment isn’t for you.
Follow the money and know how your investment makes money. With stocks, you’re purchasing a share of ownership in the company, which entitles you to a share of the profits. Bonds are like an IOU, where you lend money, and the borrower promises to pay you back with regular interest at a stated rate over a stated time period. Exchange-traded funds or mutual funds pool money of multiple investors to buy an assortment of stocks, bonds, cash alternatives, or other assets. Most investors will want to avoid higher risk assets like those that use leverage or are considered alternative assets like private equity or hedge funds because they are usually illiquid. You may not be able to sell them if you need the cash.
You can also follow the money when it comes to financial advice. When you pay a financial professional to help you invest, how is that professional getting paid? Some financial professionals receive a commission when you purchase investment shares, but sometimes their recommendations could be tempered by how much commission they are paid. Others will charge you a flat fee for the advice, regardless of whether you purchase the investment or not. Ask your professional if they follow a suitability standard, meaning they recommend investments suitable for your situation, or if they adhere to a fiduciary duty, meaning they recommend investments that are in your best interest.
“Follow the money” isn’t the end-all piece of investing advice, but it can help you avoid circumstances that may not work out in your favor. If you have questions regarding your investments and the risks involved, the experts at Henssler Financial will be glad to help: