Friday, December 12, 2008

If It Sound Too Good To Be True...

If it sounds too good to be true… yep, it usually is.

You’ve heard this saying time and time again, but it is not always easy to know when you are simply following existing guidelines to save money and grow your profits, or when you are tempted to “go for the bleachers” and fall prey to a party who promises you the moon but delivers nothing but heartache. I always go by the motto that it is better to under promise and over deliver than vice versa.

Even wealthy investors are easily misled when dealing with the mask of seemingly successful individuals whose motives often come down to personal greed and arrogance but initially appear to offer a brass ring.

I’m not sure any of us saw the downfall coming of major banks, investment firms and large corporations. It seems even their leadership was mislead into believing some of these complicated investment vehicles were safe and prudent.

However, there are many red flags to look out for that have held true for years. Here are just a few at the top of my list.

* Don’t get fooled by someone wearing a 4K suit and driving a Rolls Royce. Give me a guy like Warren Buffet any day. Even though he’s one of the wealthiest men in the world, he lives in the same house he bought 27 years ago and drives a modest car. I find many people who flaunt wealth come into it at the expense of others they have taken advantage of. They are the only ones that get richer until they get caught doing something illegal or immoral.

* If history shows the average investment return in a vehicle such as stocks or mutual funds is 7 or 8 percent on average over time and someone tells you they consistently get 12 or 15 or 20 percent annually even through bad times, make sure they are able to explain exactly how this is being done. It may be possible, but chances are they are luring you in with empty promises and you only find out once you have lost money that these claims were untrue or exaggerated.

*If someone tells you they are letting you in on an investment typically only available to a very select group – beware. I have seen even an educated man fall victim to this sort of desire to “play with the big boys”. There is often a cloak of secrecy surrounding the details that can’t be disclosed due to “protecting the sources” who deal only with the well healed. It’s usually a scam.

* Legitimate companies value transparency and disclosure. They have nothing to hide and are willing to “show you where the money is” at all times. I don’t like companies that tell you their investments or structures are all proprietary and unique only to them so they aren’t able to disclose the details unless you give them money first.

* Know that any unregulated investments are just that. They can set their own rules and are buyer-beware. This is why hedge funds and the like take huge risks and can either sky rocket or go belly up in a very short time.

In this world where governors try to sell Senate seats, former NASDAQ chairmen run Ponzi schemes, company execs pay themselves huge salaries while their companies and stock holders go broke, and politicians fall to scandal, it makes sense to stick to the basics.

This doesn’t mean burying your money in the backyard or not doing everything you can to maximize what you do have, but don’t jump at a chance to gamble on hitting a home run when taking one base hit at a time will usually win the game and allow you to sleep at night.

Paula Straub

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