Why Investors Lose Money on Wall Street

Investors fear losing money, but they are almost as afraid of losing out, of not making money when they could have. This is referred to as the fear and greed cycle and is one reason the Wall Street pros make money while the individual investor often loses it.

Here's what typically happens. Let’s use a hypothetical investor named Sam. Sam hears about how much money his buddies are making in the stock market. So, Sam decides to invest his retirement money in the market. He goes to his local advisor who promptly throws his money into the market, while Sam imagines all the money he's going to make.

Well before long, the market starts to go down, maybe it loses 3%. (By the way, there will always be times when the markets go down.) Sam figures the market will turn around in a few days, and often it does.

But this is one of those times when the market continues to go down. Now Sam thinks, "What if this keeps dropping? I'm losing money, not making it!" So Sam calls his advisor, and inevitably the advisor tells him to just hang in there, it will come back.

But this isn't a normal correction and the market continues to decline. It's up one day and down the next, but it's down more than it's up. This goes on for days and then for weeks. Before Sam knows it, his account is down 7-8%.

Sam is really getting nervous at this point. Everything he hears tells him that the market and the economy are in terrible shape. And now, the thought of losing even more money is keeping him up at night. (By the way, Sam hasn't heard from his advisor all during this time.)

The next morning he can't take it any more. He calls his advisor and tells the advisor to sell everything! The problem, though, is that there are millions of “Sams” out there and they are all calling their advisors and saying the same thing. You can imagine what the markets do that week! When there are more sellers than buyers the prices drop, and drop quickly.

In the end, Sam loses around 10% and vows to never invest in the stock market again, or at least to wait until things turn around. Soon, sometimes within days, the markets start going back up. Sam hears about it on the news, but the pundits are still saying that the economy is in terrible shape. So he decides it isn’t time to get back in.

After a while, the markets are up so much that everyone on the news is talking about how great the markets are. Those same experts that were saying the economy was so bad are now saying the crisis is over and that the markets will continue to go up and up.

At last, Sam thinks the danger is past. He calls his advisor and moves his money back into the market. Remember, there are millions of “Sams” out there and they are all calling their advisors and saying the same thing. The markets may continue to go up for a while, but before long they will start to correct.

I think you get the picture. It seems like all that Sam does is lose money. Why? Because, he's acting just like everyone else. And that's the problem. To make money in the markets you need to buy before everyone else buys and you need to sell before everyone else sells. Professionals call this the fear and greed cycle. Professionals are well aware of what the Sams of the investing world are thinking and the actions they will take.

Investing in the stock market is a zero sum game. What that means is that every time one person is making a dollar, someone else is losing one. Whenever you buy a stock there is someone selling it to you and vice versa. Who do you think was buying Sam's stock when the markets were down 10%? It's the professionals. Who do you think was selling that same stock back to Sam later when the market was up 10-15%? That's right, the professionals.

That's why it's the professionals that make money on Wall Street and not the individual investors that are following the advice of their traditional just hang in there, advisors.

In addition to being a nationally syndicated columnist and Certified Financial Planning Practitioner, Mr. Voudrie provides personal, private money management services to clients nationwide. Read more of Jeff's financial and investing articles or ask Jeff a financial question.

The Wolf Among the Lambs

For years, I've been warning seniors about the dangers of equity indexed annuities. And I've taken quite a bit of heat over it from those in the insurance industry. While many agents, and some readers, have discounted my views, the uproar against equity-indexed annuities, and the tactics used to sell them, is growing louder and louder. And now the national media has entered the fray.

On Sunday, April 13th, 2008, Dateline NBC aired a hidden-camera investigative report titled "Tricks of the Trade" with reporter Chris Hanson. They recorded actual insurance agents selling equity-indexed annuities to seniors, went to their seminars, and even attended training sessions for agents.

Agents might dismiss my claims when I say that equity-indexed annuities are a horrible investment, but it's hard to disqualify the comments of Joseph Borg, the Alabama Securities Commissioner. When asked by Mr. Hanson if he would recommend an equity indexed annuity to his own mother, Mr. Borg responds, "I wouldn't. I wouldn't recommend them to anybody."

Mr. Hanson also talks to the Minnesota Attorney General Lori Swanson about the sales tactics agents use to convince seniors to buy these investments. She says, "What is tragic about it is when those agents go into the seniors' homes, it is literally the wolf among the lambs. It's happening all around the country and it's happening on large scales and these insurance companies need to knock it off."

These comments come, not from other financial advisors like myself, but from public servants entrusted to protect the citizens of their states. And these aren't the only public officials who feel this way. Many states are taking action against the insurance industry and the tactics used by agents selling these products.

One of the biggest bones of contention is the common sales tactic of gaining credibility with the investor through the use of deceptive credentials. Often, those selling these products are life insurance salesmen who have little if any training, background and experience in investing. In fact, for most it is against the law for them to render financial advice. But isn't that exactly what they are doing?

Dateline showed this scheme in great detail when they secretly attended Annuity University, a training seminar for agents selling equity indexed annuities. They discovered, that for the right price, an agent can make it appear they've written books, magazine articles, and have been interviewed by a national radio show. You can even have your name and face on a magazine cover that contains a large picture of Federal Reserve Chairman Ben Bernanke.

All of this is designed to make the insurance agent sound more qualified than they might otherwise be. And it works. Many seniors follow the agent's advice because of these credentials. Minnesota Attorney General Lori Swanson is not amused with these tactics and doesn't pull any punches in her response. She says it's like "handing them [the agents] loaded guns so they can walk into the senior's home and rip them off."

Ms. Swanson goes on to say that "this is part of the marketing ploy, build trust, show you're reputable." Dateline reporter Chris Hanson, who is not an agent, was able to get his own picture and name on a magazine for $1,500. "That's terrible, and you've captured it right on tape," responds Ms. Swanson, "what we're hearing in all of these cases and investigations that we're bringing [is] that these agents are not telling the truth."

Speaking of not telling the truth, Dateline captured instructors at Annuity University training agents to frighten seniors by telling them that their money isn't safe at the local bank, because the FDIC is insolvent. This simply is not true and there has never been a single instance when the FDIC has failed to pay out on a valid claim.

Ms. Swanson also believes agents aren't being truthful when discussing surrender penalties with potential investors. After viewing the typical sales pitch caught on hidden camera, she replies, "It's absolutely misleading. I mean really, they need to deal with these seniors straight."

So don't just take my word for it. Be very careful when considering any investment. Do your own research. Read the contracts and the fine print. If you can't understand it then don't invest.

In addition to being a nationally syndicated columnist and Certified Financial Planning Practitioner, Mr. Voudrie provides personal, private money management services to clients nationwide. Find more articles about annuities or investing or ask Jeff's advice about your personal financial situation.

Harmed Investor Gets Justice

Countless investors have lost large portions of their investments. Some have been in investments where they lost everything. But investors looking for help in recouping losses often find there are few places to turn for assistance. Read on to learn about one investor that finally got justice.

Many an investor has been harmed by their advisor's inaction or being put in unsuitable investments. It's natural that those feeling wronged seek retribution. So, where do investors turn if they need justice?

For securities investments such as stocks, bonds, mutual funds and variable annuities, it's to the National Association of Securities Dealers (NASD). The NASD is a self-regulatory organization created by the securities industry, not a government agency.

In 1987, the Supreme Court ruled that investors can be required to waive their right to sue in court in order to open a brokerage account. Now all grievances with a brokerage firm must first go through arbitration.

Fifty-five percent of arbitration cases rule in the investor's favor. But the average settlement is about 12 cents on the dollar. It so happens that the judges (even those deemed to be independent) are from the securities industry! No wonder brokerage firms prefer arbitration!

It is a long, expensive process to pursue arbitration on an individual basis. When you look at the average settlement, you will be lucky to cover your legal expenses. Your chances can be greatly improved, though, if you are one of many members in a group that had similar experiences with the same broker or firm. Think of it as class-action arbitration.

That's how Bob finally got justice. He invested $750,000 in a variable annuity recommended by an advisor in 2000. Three years later Bob's investment was only worth $350,000. When Bob became my client in November of 2002, there was little recourse he could take.

About a year later, though, he saw an advertisement in the local newspaper about a seminar just for those retirees of his company. It was put on by an out-of-state attorney that specialized in handling arbitration cases.

It turns out Bob, wasn't the only victim. Many of his fellow retirees used the same advisor that he did. Almost all had virtually the same experience. Collectively, they were able to get more of the attention they deserved during arbitration.

After 3 long years, Bob has received a settlement check for $166,000. It doesn't make Bob whole, but it sure helps ease the pain. Bob was one of the lucky ones.

Guess what happened to the broker? Not much. There won't even be any hint of the problems he caused on his permanent record. That means other investors will never know what this advisor did to Bob, and his fellow retirees. That means it can happen to them, too.

You see, the advisor you use could have lost investors hundreds of thousands of dollars and you will never know about it. There's no way to know if your advisor has had cases go to arbitration in the past. There's no way to know if he/she has any current cases in arbitration.

So what can you do to protect yourself?

First, ask your advisor if they have ever had any written complaints and/or cases that went to arbitration. You should also do a broker check at www.nasd.com.

Second, find out how the advisor will monitor and manage your investments on a day-to-day basis. Beware of the advisor that does nothing. Look for an advisor that has specific procedures in place to monitor and manage your account. Few do.

Third, make sure you have the ability to make changes should something go wrong. That's why I am so adamantly opposed to investments that have long-time commitments or big surrender penalties. They limit your options, making it expensive to switch investments down the road.

Fourth, if you've been wronged, try to see if there are others in the same boat. Search the internet for existing class-action lawsuits and see if you can join.

Typically, the problem is the advisor, not the type of investment. Use an advisor that will prevent a significant loss from happening in the first place. Bob was able to recover a portion of his loss. Justice was served, at least partially. Of course, the best strategy is to do your research before you invest your hard-earned money.

In addition to being a nationally syndicated columnist and Certified Financial Planning Practitioner, Mr. Voudrie provides personal, private money management services to clients nationwide. Find more articles or ask Jeff a financial question at www.guardingyourwealth.com.

Special Announcement: Dateline on Equity-Indexed Annuities

Dateline will be airing a hidden-camera investigation segment this Sunday that focuses on how Seniors across the nation are being taken advantage of by unscrupulous insurance agents selling a product called an Equity-Indexed or Fixed Index annuity.

I have been writing a weekly financial advice column for over 4 years and have consistently warned investors about the hidden dangers of these products. I have been contacted by so many investors across the nation that I wrote two, in-depth Special Reports that focus solely on helping the investor understand how these products actually work so they can make an informed decision before buying one. I've been contacted by attorneys nationwide as a result of those reports and asked to serve as an expert witness.

You can find my in-depth Special Reports (provided to investors free of charge) at these URLs:

www.guardingyourwealth.com/SpecialReports/Allianz.htm

www.guardingyourwealth.com/SpecialReports/GeneralEIA.htm

Always At Your Service,

Jeffrey D. Voudrie, CFP President

The Three Risks You Must Avoid

There are many financial risks that investors want to protect themselves from (inflation risk, interest rate risk, market risk, etc). But there are three risks that most investors don't take into account and I believe not doing so can quickly get them into trouble. I call them control risk, access risk and flexibility risk. Let me explain.

When I refer to control risk, I'm talking about your ability to exert control over your money. Since you are the one that will have to reduce your standard of living if something happens to your nest egg, it's vital that you retain control over it. The problem with annuities, life insurance and other packaged products is that you immediately lose control over your money. You are ceding control to someone else. They are the ones in the position of power because they get to decide what is done with your money. They use contracts that specifically limit your control and give it to them. Why would you ever want to surrender control over the most important financial asset you will ever have? It doesn't make sense!

The second risk that people fail to think about is access risk. Whose money is it? It's YOUR money. If you own something, shouldn't you be able to access it any time you want? You own your home and you can use it whenever you want. Imagine giving your home to someone else where they control what happens to it and you can only access it when THEY allow you to. That doesn't make any sense, yet that is exactly what happens when you buy many of these packaged products.

There's no way to know what life is going to be like tomorrow. Few could have imagined the terrorist attack of 9/11. Few expect to be in a car accident. No one thinks that they will have a heart attack today, but there's no way to know.

Let me tell you a true story that just happened. My neighbor had some friends stop by yesterday. These snowbirds, were driving their motor home from Arizona back to the Northeast. As they were driving across the barren roads of west Texas, they didn't realize that there had been an auto accident up ahead. The accident had happened on the other side of the Interstate, but a highway patrolman had stopped traffic in their lane and a single car had come to a complete stop. For some reason, the patrolman's car had no flashing lights to get their attention.

You probably know what happened. The speed limit was 75 mph there and although the motor home wasn't going that fast, it takes a long time to get one stopped. He didn't see the stopped car until it was too late. He swerved around it, barely missing it, but the truck he was towing clipped the back end of the stopped car, totaling their truck. But it gets worse. As he swerved around the stopped car, the patrolman stepped out right in front of their path. The impact threw him onto their windshield then dumped him onto the grassy median. The officer ended up being air-lifted to the hospital.

This retired couple is still waiting to see if charges are going to be brought against them. And they most likely will. Their lives changed dramatically that instant, something they couldn't have foreseen. Imagine how you'd feel if that happened to you!

They could easily end up spending tens of thousands of dollars in legal fees. This is just one of many true examples that illustrate why free and complete access to your money is critical.

The third risk is Flexibility Risk. This is closely related to control and access risk. Basically, since it's your money you should have the flexibility to do whatever you want with it. You should be able to make changes to the way that it's invested. You should be able to move it from one place to another without having to pay a penalty. You should be able to pull it out and use it to help a loved one or just to take that dream vacation. But flexibility is just one more thing you lose when you buy a packaged product.

These three risks are difficult to place a dollar value on until you are affected by them. Then they are priceless.

In addition to being a nationally syndicated columnist and Certified Financial Planning Practitioner, Mr. Voudrie provides personal, private money management services to clients nationwide. Find all his articles at www.guardingyourwealth.com.

House of Cards Part 2

Last week, I talked about how the current credit crises evolved. This crisis is the result of mistakes made by the homeowner, the mortgage company, the investment banks and the rating agencies. This week, you'll see what caused the House of Cards to fall and will learn how this example can keep you from making a financial mistake.

Leverage was used at each stage of the mortgage-chain. Leverage is when money is borrowed so that additional investments can be made. The idea is that more can be earned on the investment than has to be paid in interest on the loan. So the homeowner borrows the full value of the home, the investment banks borrow money so they can buy more loans, etc. While leverage can increase returns, it also exacerbates a decline.

For example, a popular concept these days is to borrow the equity from your home and invest it in life insurance (one that I don't agree with). Perhaps both spouses work and their income easily covers the additional mortgage payment. The couple only sees the potential profit and doesn't realize if things don't work out, this transaction can be very costly to unwind.

Suppose one spouse loses their job and their income falls short of covering the mortgage payment. Or maybe their mortgage payment increases because of interest rates. Unless the spouse can find another job, the couple will be faced with having to sell their home quickly to pay back the mortgage company. If there are lots of other people in the situation, all trying to sell their homes at the same time, the value of a home is going to drop quickly.

Taking this example a step further, if home prices in general have declined 20%, then those who had 20% equity in their home suddenly have none. Now their home is only worth what they owe. Or, they may have a home equity line of credit. The bank is going to reduce the line of credit based on the decreased amount of equity.

That's basically what has occurred on a national scale at every point in the mortgage-chain. If a portfolio of mortgages is used as collateral and it's suddenly worth 50% less, the lender is going to want their money.

What should we learn from this? First, examine why so many homes are in foreclosure. Is it because the borrower wasn't informed about the details of the loan? No, the bank or mortgage company provided lots of fine print for homeowners to sign, explaining every aspect of their loans, including how interest rates would increase payments in the future.

Did banks or mortgage companies illegally provide mortgages to consumers who weren't qualified? No, not really. Obviously, the mortgage lenders wanted to sell as many mortgages as possible because that's how they made money. It wasn't their job to protect the borrower.

It's the same in the world of investing. You can't expect the one selling you a product like a mutual fund or annuity to be the one to watch out for your best interests. As a consumer, it is your responsibility to do the research, read the fine print and thoroughly understand any financial contract you sign. A financial advisor isn't going to say to you, "Hey, this might not be the best investment for you. Your money is going to be locked up for 15 years and the only way you can tap it is by paying a big penalty. Besides, you can earn even more using a balanced portfolio of quality investments."

Believe it or not, a commission-based broker or agent is NOT legally obligated to do what is in your best interest. They only have to offer investments that are suitable. They don't have to make sure you understand the fine print you sign. They don't have to go over all the future consequences of your financial decisions. They don't have to sort through all your investment options and find the one that fits you perfectly. That's not their job!

Don't let fear or greed cause you to defy common sense when it comes to investing. Do independent research, read and carefully parse the fine print and if you can't understand it then you shouldn't buy the investment. Don't let a smooth-talking advisor cause you to skip any of these important steps.

Nationally-syndicated financial columnist and Certified Financial Planner(R) Jeffrey Voudrie provides personal, in-depth money management services and advice to select private clients throughout the USA.

Read more or ask Jeff a financial question at www.guardingyourwealth.com.