Need Investment Advice

The first rule of making money is not to lose it.

I prefer to say that the first rule of investment is "don't lose your principal" (with apologies to Bob Graham.)

The first rule of investment analysis is: identify the risks of loss. The first question you should always ask is "how much could I lose, what are the chances that I will lose, and how confident can I be in my analysis of the risks?" Only after you have a firm grasp of the risks should you even consider the potential gains.

Generally, if the potential gains aren't at least three times greater than the potential losses, there is not enough upside potential to justify the risk.

And as someone else said, diversify. This doesn't just mean that you should own more than one stock, it means you should own more than one asset class (stocks, bonds, precious metals, real estate, foreign currencies), have investments in more than one industry/sector, and in more than one geographic area (continents, countries, regions, etc). Of these, choosing the right balance of asset classes for the current market situation is the most strategically important.

This is all good advice. But is it something that can be done by anyone using Money Magazine as a guide? I don't believe that is the case. Joesbucks thinks that the way to make 10% annually is to bet on the identification of a short term trading range on individual stocks.

Asset management is a tough business that is made to appear simple by a multiplicity of financial publications and newsletters. “Send me $450 for my newsletter and I’ll show you how to turn $1000 into $1 million.” Or “Buy Money Magazine and we’ll tell you the 10 best funds for the New Millennium.”

Why don’t we ever see: “Avoid the Doctors and Hospitals, Remove Your Own Diseased Lung?” Or “The No-Load Way of Building Your Own Tudor Castle?” How about “Avoid Life Insurance Premiums, Immortality Made Easy?” Is navigating the financial markets really that much easier than surgery or home building? Just buy good companies and hold on to them; tell that to Lucent’s shareholders (how can you bet against Bell Labs)? Avoid the tech stocks and go with quality? How about GE at 60 (down to $28?) or AT&T from $65 to $10? Merck, Duke Power, IBM, Microsoft, DuPont, Kodak, Pfizer, Ford, GM, etc., etc., etc. Can you say “Blue Light Special?”

Generalized advice regarding diversification, asset allocation and risk vs. reward is OK as far as it goes, but it is not a concrete plan, and won’t be until an honest, reliable professional creates a list of securities to buy, and then monitors the progress of the portfolio to make mid-course corrections.

This is, and there rarely is, a market for amateurs with a few bucks anxious to try their luck. The fees paid to an honest, knowledgeable professional are an insurance policy against much bigger losses in the stock market.

The alternative is an expensive lesson in “what can go wrong.”

Joesbucks, I read your request and I have some perspective on this.

My brokerage License (Series 7) and Investment Advisor License (Series 66) just expired, Hooray! So call this a confession of a former stockbroker if you want.

First don't dabble, maybe with some mad money for fun, only one stock.

2nd, Pay for the professional advice period. I do, and I was in the business, you can't think straight about your own money.

The type of advice is critical (more on this later), but first the brokerage firms.

The most moral firm on the street bar none is C. Schawb. I came sooo close to working for them, they couldn't extend the offer the market tanked! There paridygm is completely different from the rest of the industry, NO COMMISSION SALES PEOPLE I have done a great deal of research on these folks, they are quite impressive. Although you may want to watch the "Fee-Based" Advisors they recommend, there relationship with Schwab may not be conflict free. The bad news they have only about 3000 mutual funds available through there Schwab One Source system vs. Fidelity's 4500.

Now on to Fidelity. They are 2nd behind Schawb, but they are the radical inventor on the street. They invent products such as the "529" plans. I got the inside story on these plans and from what I here Fidelity invented it after they found it could be done via the tax code. They have 4500 Mutual Funds available through there various "Select" Accounts. I would shy away from them for advice, it is not there forte' but you may consider them for your broker/dealer.

Now were to get advice, The least known advisors and as far as I am concerned the ones with the highest morals and ethics in this area are the "Fee-Only" Advisors. THIS IS WERE TO GO. I worked in a support capacity to an advisor in this arena until I became "Mr. Mom" a few months ago. Now the "Fee-Only" logo can only be used by members of NAPFA (it is trade-marked), The National Association of Professional Financial Advisors. They have to be CFP's and they receive no (Zero Zip Nada) commissions or compensation from any insurance or brokerage firm for any of the advice they give. They typically recommend no-load instruments, (they usually use Schwab for the Broker/Dealer) and many also due your taxes, tax planning, insurance reviews, assist in simple wills, and some small business coaching/planning, depending on the advisor. They can be found at: www.napfa.org

Also check out Cambridge Advisors, at www.cambridgeadvisors.com . These folks are the leaders in the fee-only area. of the top 100 Financial Planners in Kiplingers in 2001, 5 were Cambridge Advisors, pretty darn good considering there are only 100 Cambridge Advisors in the USA (total).

I almost dropped out of the business and I did a great deal of soul searching and I came to the conclusion that the "Fee-Only" Advisors are the only way to go, and they may be 20 years ahead of there time. I truly believe everyone on the street is going to have to go this way or fade away, the public isn't gonna stand for the shananigans anymore. I fell this way to the point that I am finishing up my education as well as being a full time dad and plan to get my CFP and return to this arena.

These folks always do what is in your best interest, The good I have seen them do for there clients is amazing, especially after your divorce, truly consider them, I know, because I have been there and help make the good things happen.

I don't like Suze Orman, too new-agey, Oprah-ish, etc.

Go to a library, get a copy of Terry Savage's investment guide, also a copy of Jane Bryant Quinn's guide. And start reading. Oh, and in the meantime, put your money in something like cds for now, or Vanguard's prime money market fund, very low fees at Vanguard.

And if at all possible, start listening to Bob Brinker on the radio on Sat and Sun. His website probably will tell you if you can get him in your area, otherwise you can read a summary of his broadcasts after the Sun show is over.

His whole point is to get people to learn to manage their own money, so you have to do some research and learn about this.

Whatever you do, don't just turn your funds over to someone to manage, you'll get it most likely with high fees and maybe even churning as your investments are turned over to provide $$ for the one managing them.

I learned so much from Brinker, and also from Humberto Cruz whose archives you can find on the web. I'm very grateful to those 2 who helped educate me, so that I learned a lot about money before I had any to lose.

Depends upon what you're after. If you plan to invest in the stock market, plan on buying and holding for awhile. Don't try to be a day trader. You'll lose your shirt. There are some good companies out there but their stock is depressed due to market conditions. If you're looking for a reputable brokerage to perform your own online trading, Charles Schwab is good one with commissions of $29.95 per trade. Ameritrade (I don't know other than advertising) sounds like it might be a good one to investigate. Since I like my own investing, I don't particularly care for mutual funds because you're basically paying someone else to invest for you. Some stock you might look at: Stora Enso, Louisiana Pacific, Nordstrom, F&M Bancorp, Potomac Electric, Northwest Airlines. There are plenty more but remember the key is to not wanting to sell immediately called timing. The return on bonds are low, however if you can buy tax-free municipals, that might be helpful. These are only suggestions. The interest rates are due to rise not fall. Interest rates are real low now as demonstrated by the Federal Reserve FOMC which kept the rates as is last week. Good luck whatever you decide to do! Just remember timing and good research.

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