02/09/2009 3:45 pm

Sheconomics

Investment Funds: Should You Hear Alarm Bells? by Janet Tavakoli

Courtesy of Janet Tavakoli

  • Lots of borrowing. In the business this is known as “leverage” or “gearing.” This is just a fancy way of saying I put down only a fraction of the purchase price. If you bought an uninsured car and put 20% down, you don’t want to take it for a spin on New Year’s Eve unless it is armor-plated. Most financial assets in this crazy financial environment don’t have that kind of protection, and when you invest in a fund, you don’t have any insurance. In fact you are the insurance. If you have the equivalent of 20% down (5 times leverage), if your car takes more than 20% damage, you are wiped out. Your money disappears faster than a car in "Gone in 60 Seconds."

  • A single strategy. If your fund’s performance is dominated by one strategy, you should worry. One type of investment strategy does not fit all markets. If you know you are making a bet on, say, buying stocks paying high dividends — some of which will have a high chance of being wiped out — go ahead. But don’t pretend it is a long-term investment, when it is actually a bet.

  • Unlimited expenses. Most funds have a cap on expenses, plus management performance fees. Ask your manager where you can find this information in your documents. Do not take his word for it.

  • Won’t answer questions. When you are about to give (or if you have given) your money to someone else to manage, any question is a reasonable question. If your manager seems too cocky, patronizes you or answers your questions with jargon, you are being mistreated. If your manager responds with irritation, anger or condescension when you ask for clarification, it is a red flag. That said, the most dangerous cat you will ever meet in life is the false leveler, the charming manager who seems to answer your questions, but in reality he is softening you up. He may be charming his way to get into your pockets (instead of your pants). Don’t fall for it.

Click here to order Janet Tavakoli’s book, Dear Mr. Buffett: What An Investor Learns 1,269 Miles From Wall Street.

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4 Reader Comments (so far…) Sign In or Register to comment

GrandeCamper
Thanks. Will have to write those points down.
By GrandeCamper on 02/09/2009 4:18 pm
BelindaJoy
Great advice. I can see a lot of investment brokers going over and beyond what is necessary to make sure their clients are assured they are legit, following the Madoff scandal. Which is a good thing.
By BelindaJoy on 02/09/2009 4:33 pm
starryNite
It sure is a good thing after Madoff and some others who do you trust?
By starryNite on 02/09/2009 6:18 pm
HABIBI
These tip’s are pretty self explanatory….Basically…A given.
By HABIBI on 02/09/2009 9:06 pm