I recently met with a prospective client on Long Island who was born in 1950. During his lifetime, he has seen the S&P 500 Index (an indicator of the strength for some of the world’s greatest companies based on their stock price) rise 70 times its value to its current level of about 1400, far outpacing inflation during the same period.

Yet after five years of recent financial market turmoil and volatility, he had the bulk of his retirement savings invested in money market instruments, certificates of deposit, and short-term treasury and corporate debt, none of which have the returns to keep up with inflation. When the topic of investing in stocks came up—he quickly noted “stocks are too risky” to be appropriate investments for his looming retirement.

As a financial planner with a deep understanding of the market, I couldn’t help but think there was a disconnect somewhere in his mind. And it may very well be related to his perception, or mis-perception, of investment risk.

“Conservative” investors and financial advisors try to keep money in safe investments because stocks are deemed too risky. In actuality, they’re confusing market volatility with risk. While stocks rise and fall more visibly and frequently, the returns have shown decade after decade to outpace inflation significantly. And as inflation speeds up, you’ll need those kinds of returns if you want to retire comfortably.

Any “conservative” investor who avoids the stock market is taking more of a risk with their future than they think.

 When it comes to financial planning, you can obviously plan for those things within your control. Diversification and investment costs will always take careful planning and rational thought to navigate.

It has become apparent that most wealth advisors lose direction when it comes to those things they cannot control, such as the course of the marketplace and tax changes. Speculation will drive these types of money managers crazy and lead them to make irrational decisions that only further the trends they fear. Investors and advisors who base investment decisions off of the "noise" and the topic of the day are destined for a sub-par investment experience.

The recipe for getting the most from your financial planning has never changed; focus on global diversification and low cost, and remove all emotion.  By abiding to these three rules, you will likely be able to outperform the vast majority of investors.

It may sound simple and boring to most wealth managers, but it’s a strategy that works.

 As the fiduciary of a 401(k) plan, you’re putting a lot on the line, especially if you keep information on fees from plan beneficiaries. Time and again, we’re not seeing the investment brokers held responsible, but rather the companies and their fiduciaries, costing millions of dollars for negligence.

Recently, ABB Inc. was fined $35.2 million when courts found they had not acted in their beneficiaries’ best interest and did not fully disclose plan fees. Kraft Foods has also seen legal action regarding its investment fund.  But it’s not just large companies. The eleven person firm, Clark Graphics, had its $2 million plan fined over $500,000 for not getting the most accurate information from their financial planner. It’s a hefty price tag to pay.

Once the wealth manager has disclosed all investment fees to the fiduciary, what can you do?  Of course, a smart financial advisor should to be very clear in communicating all responsibilities to their fiduciaries, but how do you know your investment broker is doing that? Fortunately, we’re here to help educate you on how to make sure everything is taken care of accurately, completely and fairly.

Four out of every five plans are at risk of this very failure with their company investment plans, including thousands of Long Island businesses, and the Department of Labor is cracking down. To learn more about how to avoid falling in this trap, attend CJM Wealth Management's educational seminar December 5th at 8:30AM-10:00AM or December 6th 12:30PM-2:00PM at the Westbury Manor. We look forward to seeing you there!

 David Lerner Associates was recently nailed for alleged unfair sales practices and needless consumer fee markups in their investment practices, leaving many Long Island investors in the lurch. Essentially, DLA was convincing their customers to put money into higher risk funds that yielded more in fees for the company, while not necessarily making the best personal wealth management sense.

What makes this especially noteworthy is how they targeted the unsophisticated investor as a way of pawning off these high risk investments. These aren’t financial advisors. These are financial vultures.

At the end of the day, you need to be sure, as an investor, that your financial advisor is upfront with you about the risks and fees associated with your investments. Regulations are starting to catch onto these financial advisors that are more interested in misinforming you and getting you to pay exorbitant fees, but it’s up to the consumer to sniff these bad deals out and know where their money is going.

Remember, there are no shortcuts to financial planning. It takes a steady hand and rational forethought to reach the goals of a lifetime. Beware of anyone telling you otherwise.

The NY Times, as it does every quarter, provides a list of best and worst performing mutual funds for that fiscal period. This is so comical and another example of how the media provides the wrong advice. In real life, mutual fund “performance” statistics are an abstraction, because people don’t get investment returns. They get investors’ returns, which because of following their emotions and chasing the best performance, are much, much worse.

Unaided by behavioral coaching, which is what any good advisor truly provides, the investor sooner or later gets defeated by their hard-wired, emotional propensity to make “The Big Mistake”. Many years ago Pogo Possum wisely observed, “We have met the enemy, and he is us.” As it relates to investing I would also like to add the other enemy is the financial media.

Most of what an investor needs to know about building and maintaining a prudent mutual fund portfolio can be summed up in five words: get diversified and stay diversified. Diversification immunizes you against “The Big Mistake” more effectively than does any other single discipline. Those that follow the discipline of reading quarterly reports, such as the one from the NY Times, and buy the best performing funds of the past quarter are especially at risk. By not taking the rational approach they jeopardize their entire future.

The calculated, smart wealth manager will always remain patient and diversified, unfazed by what happens in the trade pubs. If you want to learn more about how you can best manage the money in your small business, RSVP for our Small Business Seminar on October 23^RD and October 25^TH .You’ll be better equipped to avoid making “The Big Mistake” with your portfolio and ensure your investments stay close to their true earning potential.