All you need in this life is ignorance and confidence, and then success is sure. -Mark Twain
As originally appeared in The Jerusalem Post on March 8, 2017.
You know how they say “Ignorance is bliss”? Well when it comes to your money it can lead to financial ruin. Too often I meet people who speak with confidence about their investments but in truth have no idea what they are talking about.
I recently received a call from a man who lives in Europe and consulted with me a decade ago. Back then he decided not to take my advice and ended up losing a very large sum in the Bernie Madoff scandal. Well, he surfaced again seeking my advice. This time he said that he own three properties but has no cash available. Sound familiar? How many times have I written about being property rich and cash poor? Anyway he needs 100,000 Euro and the advice he received was to take a loan out against one of his properties. I said I thought that was very bad advice and he should sell off one property and be flush with cash. I figured that his 100,000 Euro projection was not going to be enough based on what he was telling me. I asked why the person told him to take a loan against the property. He said they told him that the property value will definitely increase more than the amount being borrowed so it made sense. I asked him whether they were going to guarantee that rise in property value? I also mentioned that if he doesn’t have enough cash now, where will he get the money to repay the loan?
As a financial adviser, I have often come across clients who think they really understand what they own and how conservative their investments are. But on reviewing their statements, we often find a vast difference between what the client thinks he has and the facts on the ground. For example, a client may say she is “a risk-free investor with a conservative portfolio,” and then we find that her portfolio is solely invested in stocks, and during the course of the year this portfolio has moved up and down by over 20%.
I think both financial advisers and clients share the blame. Financial advisers have an obligation to explain investments to their clients and should take the time necessary so that the client understands what they are investing in. If they are advising them on other financial matters they also need to fully explain the pros and CONs of their advice. On the other hand ultimate responsibility lies with the client. It is always worthwhile taking the time to understand where your money is being invested, and you should always ask questions until you are totally clear about what you are investing in.
Knowledge is key
When it comes to making decisions, focus on the whole range of the investment’s characteristics rather than simply on hopes of a high return. It is necessary to understand the cost, degree and nature of the risks, investment goals, performance history and any special fees associated with an investment before you decide to purchase it. One should also never assume that an investment is federally insured, low risk, or guaranteed to deliver a certain return. Find out all the necessary information – and then make sure that you understand it properly. Then you can check it against your own goals and risk profile to see if the recommended type of investment is a good fit.
Continued cooperation with your financial adviser will only help you in your efforts to make sure that your investments remain consistent with your goals. Periodically reviewing your portfolio with him is a good way to assess constantly whether it is still consistent with your needs. On the same note, make sure that your investment strategy remains current. If there is a change in your financial situation, consider whether your strategy needs to be reevaluated.
Remember: ignorance isn’t bliss. Know what investments you have and why you have them.
The information contained in this article reflects the opinion of the author and not necessarily the opinion of Portfolio Resources Group, Inc. or its affiliates. Aaron Katsman is author of the book Retirement GPS: How to Navigate Your Way to A Secure Financial Future with Global Investing (McGraw-Hill), and is a licensed financial professional both in the United States and Israel, and helps people who open investment accounts in the United States. Securities are offered through Portfolio Resources Group, Inc. (www.prginc.net). Member FINRA, SIPC, MSRB, FSI. For more information, call (02) 624-0995 visit www.aaronkatsman.com or email firstname.lastname@example.org.