Three Types of Wall Street “Bullies” to Avoid

As we seek to be successful investors, there is no shortage of products or people who will try to derail us from academically sound investing principles.

This week, we will look at three types of Wall Street “Bullies” who try to derail investors:

• Con Men
• Prognosticators
• Gurus

Con men are the easiest to see… after the fact. Bernie Madoff may come to your mind as running one of the largest Ponzi schemes of all time. Basically, he would take people’s money and pretend to invest it in a “no lose” strategy. He kept it for himself and when someone needed a withdrawal, he would use other people’s investments into his “fund” to pay the “withdrawal.” Lots of money was lost in this scheme.

How do you avoid such a con man? Be sure that your adviser, your custodian, and money manager are 3 separate entities. Bernie was all three - he met with you, he held onto your actual money (custodian), and he managed the money (like a fund manager). My clients meet with with me as their adviser, we use a third party custodian who does not manage the money, and we use a different company who provides the money management.

Prognosticators are everywhere and are among the talking heads on TV. These are the folks who make claims that they know which way the market is going next and therefore what you should do with your money. If an investor were to track such a person’s record to see how often they were correct, they would find that it is never 100%.

The truth is that for any of these predictions to work, the person would have to know the future. I don’t know of anyone who can accurately predict the future with enough certainty and clarity that I would work with them as an investment adviser.

Gurus are also everywhere and also among the talking heads on TV. These are the folks who may not outright claim that they know how the market is going to move, but they try to convince people that they are savvy enough that they can successfully navigate things to give a return better than the market would.

The truth is that virtually no one can successfully do this. Study after study has shown that net of all fees, no so-called guru can beat the market no matter how savvy they are.

What is solution then? How should investors invest their money? I recommend using Nobel-prize winning academic principles that have stood the test of time. We use investing principles such as Modern Portfolio Theory, the Three Factor Model, and passive indexing to create portfolios that don’t need a prediction of the future to work. They don’t need someone to actively react to how the market moves. These portfolios are designed with all of those things factored in. Now, it is time to let the market work.

If you would like to hear more about how we build portfolios for our clients or have questions about yours, please contact us.