The Family Groove | Money Matters | How to develop an investment strategy in a post-ponzi world

MONEY MATTERS
SPENCER D. SHERMAN, CEO OF ABACUS WEALTH PARTNERS AND AUTHOR OF
THE CURE FOR MONEY MADNESS, GIVES YOU THE TIPS YOU NEED TO CREATE
REAL AND LASTING FINANCIAL SUCCESS FOR YOUR WHOLE FAMILY

HOW TO DEVELOP AN INVESTMENT STRATEGY IN A POST-PONZI WORLD

A lot of ink has been spilled on this bad economy. We continue to read about corrupt mortgage
brokers and self-interested Wall Street CEOs. And then we read about Bernard Madoff and we
wonder how we can ever trust any aspect of the financial system again.

Money Matters

If some of the savviest investors around were drawn to Madoff, is it possible for any of us to find a trustworthy financial adviser? Absolutely. But we have to ask why people were drawn to him. When we feel compelled to outdo everyone else because our self-worth depends on our material success, we are easy prey for someone like Madoff. You might call it greed, but I call it money madness: the fear of missing out on an opportunity, of not measuring up to our friends, of being left behind. But when we realize that our self-worth is not equal to our net worth, then we focus on our own finances and we don’t care how we measure up to our friends. As a result, we make much wiser financial decisions. Furthermore, even if Madoff had been honest and ethical, he still had the latitude, within a hedge fund structure, to invest in anything and at any level of risk. Just as with other hedge fund managers who have the unregulated freedom to take on any level of risk, an honest Madoff could have lost everything, too.

The truth is that it’s just not that hard to make money from investments. If you invest in a highly diversified passive portfolio and you are a long-term investor who is committed to staying in the market no matter what happens, over time you will make more money than most professional money managers. Will you make what Madoff promised his clients? Probably not. But are you willing to take that much risk for just a little bit more money?

What is a highly diversified portfolio? Many people believe that buying stocks in a variety of industries is diversification. But studies from Yale confirm that it is asset class, not industry, that determines the performance of your portfolio. Asset classes include large U.S. stocks, small U.S. stocks, large value stocks and their international counterparts, commodities, domestic and international real estate, and fixed income. Each of these asset classes tends to respond to economic events in different ways. This increases the likelihood that as some classes go down in value, others will go up. In other words, some will zig while others zag. Owning companies that both zig and zag is what minimizes risk and volatility, and actually increases our bottom line. I have a detailed chapter about the power of diversification and my investment strategy, The Rainbow Portfolio™, in my book The Cure for Money Madness.

So how do you select a financial adviser? If you can keep your emotions from meddling in your financial affairs and you have the discipline to stick to a strategy like The Rainbow Portfolio, most of us don’t need an adviser. But if you do want professional help, contact the National Association of Personal Financial Advisors. Unlike stockbrokers, NAPFA members do not charge commissions. I’ll say that again: NAPFA members do not charge commissions, they are fee-only advisers. This is the single most important criterion for choosing a financial adviser. Why did Wall Street firms go bankrupt? Because their money managers’ incentives were strongly correlated to their personal gains. You want to hire someone whose incentive is to make you money, not them. Once you’ve found some potential candidates, check their references and interview them. What does your gut tell you? Do you feel you can talk to this financial adviser? Can you share your values and your concerns? Can you have open communication? How does your spouse or partner feel about this person? The important thing is to protect yourself from being lured into a complex strategy that lacks the necessary checks and balances. In other words, develop an investment strategy and financial plan that is so transparent and understandable to you that you can trust yourself with your own money.

Spencer Sherman is the author of The Cure for Money Madness and the CEO of Abacus Wealth Partners. He lives in Northern California with his wife, two kids and a bichon frise puppy. Learn more at www.curemoneymadness.com.