3-Steps to Avoid Fraud
A 3-step outline you can use to avoid financial ruin.
1. Understand your investment trade-offs
Risk can never be eliminated, only transformed. What does this mean? Every investment has a trade-off. There is no such thing as a free lunch. For example, if you want to add convexity to a bond portfolio, you are going to trade that convexity for a lower coupon payment. If you are buying a growth stock, you give up receiving dividend payouts. If someone tells you there is “no downside” they are the greater fool.
To avoid fraud when evaluating an investment, first think about how each investment impacts your overall portfolio not just its characteristics stand?alone. Does this new investment enhance what I already own? To simplify the practice, take a piece of paper and fold it in half. On the left side write out all the benefits (dividends, daily liquidity, exchange traded) on the right side write out all the negatives (higher volatility, economic and political risk, lose initial investment). Try to make a fair balance between both sides to give you a clear picture of the trade-offs.
2. Know what you own
With the multiple layers of financial intermediaries, it is difficult to know exactly what you own. Financial products such as mutual funds or ETFs can mask the true value of your ownership. For example, many investors in Gold would be surprised that their investment isn’t backed by any physical Gold, but rather the good faith promise of an institution.
To avoid fraud run a simple holdings based analysis. This is typically provided once a quarter and posted on the SEC website for publicly listed securities. Be sure to review the top ten positions and see if it matches with your investment strategy.
3. Be prepared to be surprised
Nothing in life is certain. Investing is behavior and psychology driven because people make irrational decisions everyday. Expect the unexpected and prepare to be surprised with any investment you own.
Tuttle Ventures LLC | Corona, CA | www.tuttleventures.com | (916) 990-8243