Wednesday, October 19, 2011

Shouldn't that be obvious?

In what may be the "duh" moment of the year, FINRA published an Investor Alert on July 25, 2011 to help counter the problems arising from the fact that, in their own words:
[I]nvestors may not realize that they could be taking on more risk if they invest in products with higher returns.
Kind of obvious, no? Still, when the herds flock to speculate in the market (rather than invest in it), such an elementary lack of understanding of financial products is bound to occur.

Other gems from the Alert include:
If you do not fully understand how your investments function, you could find yourself surprised by outcomes you didn’t expect, such as illiquidity, exit fees, loss of principal or the return of your investment in a form other than cash.
The promise of higher return is almost always associated with greater risk and an increased possibility of investment losses.
Legitimate investments that promise returns of 30, 50 or even 100 percent per year without any risk to your principal simply do not exist. Always independently verify who you are dealing with and whether the seller of the investment is licensed to do business with you.
Seems to me that the brunt of FINRA's advice is two-fold: (1) don't get greedy (i.e., by participating in Madoff-style get rich quick schemes) and (2) do your homework. After all, the key difference between a speculator and an investor (and no matter what nomenclature the financial press favor, most "investors" today are, in reality, speculators) is the amount of good ol' fashioned research an investor does before tossing their cash to a third party (be it the markets or Uncle Jeff).

So next time you're looking to invest, grab a calculator (or abacus) and all the info you can get your hands on and get to work.