Doing well with your finances is as much about avoiding mistakes as it is about making the right choices.
 
Greed: This real-life story illustrates greed’s serious threat to individual investors. A retired couple came to me in 2007 for advice about their portfolio. They had amassed $500,000 through a lifetime of hard work, sacrifice and savings. Their investments had also benefited nicely from the stock market gains of 2003 through 2007. They asked me to review their finances and to help them get retirement income from their portfolio. The wife had urged her husband to meet because she was nervous about all of their money being in the stock market. If the market did collapse, she wanted to make sure that their retirement lifestyle would be protected. After a thorough analysis of their investment holdings, I identified some problem areas. Of primary concern: 100% of their portfolio was invested in just a handful of “high octane” mutual funds that were rather aggressively invested in the stock market. I made recommendations on how they could enjoy income from their portfolio, substantially lower their risk of investment losses and still have the opportunity for continued growth. Unfortunately, the husband would hear none of it. When it comes to making logical financial decisions, we can be our own worst enemy. Intoxicated by dreams of endless portfolio growth, he would not agree to the changes that would have provided a high probability of sustainable retirement income and better protection against a stock market downturn.

 

About a year later, I received another call. The couple’s aggressive $500,000 portfolio had plummeted to just $250,000. As you might expect, I suggested that there were still ways that they could create retirement income and better financial security with the remaining $250,000, but the husband could not see anything but a $250,000 loss. His greed had now been replaced by deep despair and paralyzing regret.

While the stock market delivered a healthy average annual return of 12.8% from 1980 to 2009 (based on the S&P 500 index), it did so with returns ranging from a glorious gain of 38% in 1995 to a nasty loss of 37% in 2008. That’s why money invested in individual stocks or growth mutual funds should not be depended on for retirement income. You may have to wait for the stock market to recover from a downturn before you can get your original investment back. Don’t let greed, or fear, get in your way. Take deliberate steps to build a financial plan that gives you the income you need without putting your life savings at undue risk.

 

Bad Advice: Sound financial advice can be very helpful to investors in helping them reach their financial and retirement goals. However, the best and most experienced advisers can still make mistakes. Fortunately, financial errors can be corrected by an honest financial professional. The real serious threats come from bad advice and financial scams. Bad advice can occur when an adviser, usually out of ignorance, recommends a product, investment or strategy that is wrong for the client. Difficulties can also arise when an adviser does not have the latitude to recommend the best financial solution because his company does not offer certain products or services. If an adviser can recommend only one company’s products, is that bad advice? No. It is selling and not advice at all. 

 

Not long ago, “Hank,” a seventy-year-old divorced man, told me he needed $20,000 a year from his $400,000 investment account to supplement his retirement income. His accounts were invested 100% in the stock market; all $400,000 was in about 75 individual stocks. Some of the stocks paid dividends, many did not. Hank needed to draw $20,000 in supplemental income each year, whether the stock market was doing well or not. He was mostly concerned about outliving his money and inflation. He wasn’t very concerned about leaving a large inheritance. Given these needs and concerns, I think the adviser who told Hank to put all his money into the stock market gave him bad advice. With this investment strategy, Hank could run out of money quickly with just a few years of poor stock market performance.

Better advice would be to give Hank a portfolio without so much risk. Yes, that would take more time; it might involve multiple accounts; it might require both stock market investments as well as fixed income products, but that is what financial and retirement planning is all about. That’s the financial adviser’s job. Expect your adviser to provide a customized financial solution, not a one-size-fits-all formula. 

 

Financial scams: Bad advice is not the same thing as a financial scam. Scams occur when a person (financial adviser or otherwise) attempts to steal an investor’s money or to get the investor to buy an investment of some type through misrepresentation, lying, and/or manipulation. Financial scams are usually more devastating than a simple mistake, or even bad advice, because of the perpetrator’s intent: theft.

 

A few years ago a gentlemen in his late sixties, let’s call him “Walter,” came to me for a pre-retirement review of his finances. He wanted to make sure that he and his wife could retire comfortably on what they had accumulated. I was able to analyze all of his holdings, except for his largest account which he said was worth about a million dollars. The performance reports indicated that his account had averaged about 18% a year and had side-stepped most of the stock market’s recent drops. Walter, understandably, was very proud of that performance. I was very curious to review the holdings, but he only had partial statements, which made me suspicious. In order for me to determine how Walter’s adviser was generating such high performance results, I would need to see complete statements. I was concerned that a great deal of risk was being taken to achieve the high returns. I wasn’t that far off.

 

Two months passed before Walter and I had another meeting. A large financial scam had been revealed in the newspaper, and Walter discovered that he had been one of the victims. He had no million dollar account. That would certainly explain why he didn’t get statements. Walter’s retirement plans were destroyed over night. He will probably work the rest of his life. The last I heard, Walter and a group of fellow victims were suing to recoup some of their losses. How do you protect yourself? Here are three steps: 1. Never write checks directly to a financial adviser. 2. Be suspicious if you don’t get complete brokerage statements. 3. If it sounds too good to be true (like 18% investment returns every year), it probably is. Run.

 

Everyday investors need to be careful with their money, but they shouldn’t have to become financial planners themselves to reach their retirement goals. Seek out established, qualified advisers in your area, interview them, research their firms, verify their credentials, and then hire one to advise you so you can focus on the other parts of your life.

 

David D. Holland, a CERTIFIED FINANCIAL PLANNER™ practitioner, hosts a weekday radio show at 9AM on AM1380 Ormond Beach, AM1230 New Smyrna Beach and AM1490 Deland. He has also authored two books in his Confessions of a Financial Planner series. Holland offers investment advice through Holland Advisory Services, Inc., a registered investment adviser in Ormond Beach. He can be contacted at (386) 671-7526. Email your financial questions to info@DavidHolland.com.