Gather Little by Little

It was a good news story wasn’t it? Much of the world did not even know what a Ponzi scheme was, let alone that it could provide a way for Bernard Madoff to perform the single most important fraud ever. On the surface, it is interesting and certainly a sensational way to sell newspapers. But beneath the surface lies a much bigger issue. Fact is that almost any investor could be fooled by such a scheme. Many of the investors that lost everything did not even know they had investments with Bernard Madoff. It has become very important for all investors to take measures to avoid falling victim in similar situations. Losing your lifetime savings or every penny owned by a charitable foundation is tragic enough when you hear about it on TV. Just imagine when you are centre stage of such a drama.

Here are 5 steps I would personally recommend to reduce the possible exposure/loss but also to avoid investments in fraudulent funds.

#1-Don’t believe everything friends and family tell you: Many of the investors who got involved did not even look into the investments purchased because they had been told about them by very close friends and family members. This is a tragic mistake. In all cases, the recommendations were sincere but the problem is that if one of your close friends or family is not careful enough, this means that you will make the same mistake. Even if the fund is recommended by trusted advisors, you should still ask questions; find out what the investment is, etc.

#2-Know what you own: Many Madoff investors did not even know they owned holdings related to his funds. How is that possible? Usually, they had given discretionary control of their investments including their entire retirement to an advisor. Even if that is the case, you should still be able to ask what you actually own, down to a fairly decent amount of details. Many investors held investments which included funds of funds. So basically, you own a unit of “company X” which owns shares of Bernard Madoff’s fund. First of all, you should always ask to know what is owned by such funds and chances are that any investor would have noticed that his fund only owned one holding might have asked a few more questions. In most cases, you will be able to know what you actually own, even if it is as of a prior date (end of quarter is usually a date when funds will release their holdings). If you are not able to know what you own, get out of the investment.

#3-Fund & Returns history: You have surely heard that “What’s too good to be true usually is”. In the investment world, that is also very true. Sure, some funds are able to put up good performance numbers over a long period of time. But no fund is able to return over 10% year after year without something being very fishy. There are thousands of corporations that try to find good strategies and if such a fund were to exist, it would have been copied. In the case of the Madoff Ponzi scheme, this was without any doubt the biggest alarm to any investor using due diligence. It seemed too good to be true to have a fund performing so well for so long.

#4-Fund Allocation: Funny how the world works. In many cases, investors that have good returns in a fund will invest more and more cash in the fund every year, hoping that it keeps on going. Actually, you should be doing the opposite in most cases. If you have decided to invest 10% of your holdings in a given fund and that fund doubles, you should be selling some of your units in order to remain at 10%. On a one year period, it does not have a huge impact. But over a few decades, this can result in having a very sizeable portion of your savings (often close to 100%) invested in one single fund. Even without the risk of fraud, this strategy is not a very smart one.

#5-Diversify managers: There are so many options when investing, why would you ever decide to give 100% of your money to one person. I agree that when you are starting off and have 20-30K to invest, it is probably not worth having a few different managers. But as you accumulate savings, you should be diversifying not only your holdings but also your assets. I’m sure that Morgan Stanley has excellent funds to invest in. But surely you can find other good ones in order to diversify your savings rather than be dependent on one single company. Think of those who had assets with Lehman Brothers. A year after the company’s unexpected bankruptcy filing, many individuals and corporations are still fighting to get their assets back.

Can you ever be 100% safe from getting caught in a Ponzi scheme? Probably not. But I really do think that following these 5 steps will go a long way towards making your financial future a little bit safer!

author: Mike

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Important: I am not an economist or an investment advisor. Everything you read here is simply opinion based on my limited knowledge and (hopefully) a little common sense.

Lately, I have been hearing all kinds of advertisements for gold. Whenever my six year old sees those “cash for gold” commercials, she tells me to sell all our gold for money. The problem is that we have almost no gold . . . jewelry or otherwise and that does not look like it will change in the near future.

The other kind of gold advertisement is the kind that pushes gold as a good investment in poor economic times. An investment in gold is a “hedge against the falling dollar” or a way to “combat inflation”. I often see and hear supposedly credible pundits and celebrities pushing gold on television and radio.

But I do not buy their pitch completely. Though I share much of the negative outlook on the economy, I am hesitant to purchase gold as a way to protect my family financially for several reasons:

Buying gold is still an investment

If I purchased gold, I would only purchase real, physical gold, also known as direct ownership. I would not invest in gold by means of indirect ownership through certificates, accounts, spread betting, derivatives, shares or any method by which I do not have the gold in hand or safety deposit box. Indirect ownership seems to come with the same risks that all other investments bring. I am not against investing, but the point of buying gold is to hedge against the worst case scenario. If the worst were to happen, all investments will plummet in value.

Performance

Again, I am not an investment guy, but the reality is that gold has not really performed well as an investment. The price of goal has only averaged about a 1 percent increase every year. However, not that many people do not buy gold as an investment, but rather as a commodity that rarely, even in the worst of times, loses value.

Price

I simply cannot afford to put any money into gold. The way the price has jumped up recently would probably prevent me from owning even an ounce.

Intrinsic Value

This is the bottom line for me. Gold has no real intrinsic value. Gold cannot be eaten, it cannot grow food, it will not cure disease, it cannot provide transportation by itself. Common sense says that if inflation goes through the roof and life becomes a daily hand-to-mouth struggle, I believe that barter will become the preferred currency and all the gold in the world will not feed your family.

Money has value because the person to whom you give it is confident that he can exchange that same currency for necessary items. Gold holds the same type of value. If things go really bad and your family is able to grow or hunt food, you will survive. Even if people have extra food, they will be hesitant to exchange it for a heavy, useless lump that cannot be eaten or provide any practical function.

Like I said, I am not an economist or an investment expert. I am not completely sure that my thoughts on this subject are correct. What do you think?

Article by Stew

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This is Stew and I am going on six months of posting here at Gather Little by Little. I am thankful to Glblguy for originally giving me the opportunity to write for a blog of this size and also greatful to Mike for allowing me to continue in this role.

The internet is really an unbelievable medium. I have been an active member of the blogosphere for almost five years. I have run several of my own blogs – personal finance, sports, politics, and theology. I also happen to be a member at almost a dozen online forums that deal with those same topics. I use approximately half a dozen different pseudonyms as well as my true identity on those boards. The internet has helped me to explore thoughts and ideas as presented by a broad spectrum of people. I enjoy interaction on a broad range of topics and enjoy sharing my thoughts as well . . . I am a blogger after all . . . bloggers by nature are people who like to put opinions on a screen and hope someone cares.

Glblguy used to have a feature on this blog entitled “Ask me anything”.  You can read some of his entries here. I thought that I might try to bring back that feature with the hope that the thoughts of this writer as well as the collective wisdom of the GLBL readership can be focused on specific questions that many readers might submit.

From time to time, questions have some up on the comment threads of articles that I have written. In some instances, I have been tempted to answer in the thread itself, but long comments are seldom read and many times blog comments are not well researched. Also, if a question is handled on a comment thread, there is also a chance that the originator of the questions may never actually check back for the answer.

There is a principle in talk radio that says that every phone call represents the opinion of a thousand listeners, so one or two questions could indicate that a number of you are wondering the same thing. I would like to share my gmail address with the readership and from time to time, address a question or two that I consider “post-worthy”. I will probably keep the posts focused on finance since this is a personal finance blog, but there are a wide range of topics that have bearing on personal finance. My areas of expertise are in theology and economics, but I would be happy to research or at least give my $.02 on any question that you may have.

I have come a long way on my personal finance journey. I am not out of debt and I have a family and a relatively low income like most of you, but I believe that through discussing Scripture and all providing input, we can help everyone become better at handling money. Please send your questions to: glblstew @ gmail.com.

Article by Stew

Photo by Eleaf.

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Congratulations! You are going broke! I mean… getting married! As I mentioned in my first post on how to save money for a wedding over at my other blog, my best friend is getting married next spring (and I also have a sister-in-law getting married at the end of next summer, in 2010). So, while I will end up  broke in 2010, as I am the best man for both weddings, I will try to share all the money savings tips related to  weddings that I could find:

Money Savings Tip #1: Talk to people

I have already written about how much money you can save through your network. A wedding is definitely a great occasion to test how good your network is to help you save money. So, whatever you are looking for (dress, flowers, ballroom, cars, etc.) tell as many people as you can. One will ultimately come through with something like:

“hey! My friend is a DJ, he’ll give you a good deal”.

The only problem with using your network is that you might risk compromising on the results. Therefore, I suggest telling your connections that you are still shopping around and ready to meet the friend without obligation. You don’t want to hurt feelings; you simply want to save money on your wedding!

This would be a great idea if you are a looking for a nice car for your wedding: if you have a rich aunt, this is the moment to give him a call .

Money Savings Tip #2: Go back to school

I was able to get a ridiculous price for our flowers because I used the first and second money savings tips for my wedding at the same time: a friend of a friend had a sister finishing her courses to become a  florist. Therefore, she was ultra motivated to do our stuff while she didn’t charge much because she was not officially done with her classes yet.

Getting a student to do certain things (I wouldn’t let a student cut my fiancé’s hair for example ), can help make things affordable. In addition to the money you are saving, they are usually very motivated as it is one of their first jobs (and it is so cool to work for such a cute couple that is getting married ). We were very pleased with the results and we paid half price.

Money Savings Tip #3: The DIY method

We used this trick to save on wedding invitations. Instead of paying $500 for some pieces of paper that will be thrown out after a month (except by your parents!), we picked nice paper with letterhead and printed all the invitations. You just have to add a personal touch (nice envelopes or ribbons) and you will have nice wedding invitation cards for 50% of what it costs if it’s done by someone else.

Money Savings Tip #4: Try combinations

We were lucky enough to combine the ballroom with the food; we actually found a nice restaurant with a room reserved for private parties. The room was big enough to welcome 150 people and looked like a medieval chapel (with granite floors, stained glass windows and a huge wooden bar). Since the restaurant was taking care of the food for 150 people, they didn’t charge us for the room. By combining wedding services, you might be able to save a few bucks!

Money Savings Tip #5: Prioritize

There are virtually no limits on how much you can spend on a wedding. Some people like it very fancy and spend $75,000 and some others manage to get a frugal wedding for less than $10,000. I guess it is all a matter of prioritizing. In my case, I really wanted to have nice cars. This is why I decided to spend more money on cars and spend less on something else. By making your wedding list budget, it will become easier to make decisions.

There are several ways to save while planning a wedding but one thing I would not be shy to spend on would be the honeymoon… after all, this is the most important part of the wedding, right?

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My daughter has requested a fairly expensive Halloween costume. She wants to be “Kit” from the American Girl book series. Hopefully I can convince her to accept one of the low cost costume ideas from Lynnae at Being Frugal. I am also taking suggestions.

Jason, one the writers at Bible Money Matters tells what you need to know about money management. As GI Joe used to tell us “knowing is half the battle”.

Craig at Christian PF puts a price tag on what it costs to raise a child. Take a look, it might be less than you thought and his numbers are closer to what my family spends rather than the numbers given by “conventional wisdom”.

If you read this post at the Wisdom Journal, your kids might stop being an expense in their early twenties . . . and maybe even have the dough to support you some day!

For those of you who have the misfortune to be unemployed, Mrs. Micah wants to help you organize your job search. I recently read about an $11 an hour job that had over 600 applicants in Illinois last week – you need every advantage you can get.

Have a great weekend! Remember, don’t just spend money, spend time with family.

Article by Stew

Photo by danperry.com

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