SmartInMoney

 

 

 

The recent revelation of a multibillion-dollar Ponzi scheme run by Madoff reinforces classic investment advices, especially for individual investors. The investors may be in the dark and exposed to investment scheme when they hand their money over to someone else called financial wizards. Good news, these days it is pretty straightforward to invest your money prudently and have direct control on them.

Thanks to investment vehicle called mutual funds and widely available internet access, anyone can manage her own investment directly without hassle and protect her from investment fraud. The following reasons make the mutual funds as a preferred investment vehicle for individual investors.

1. You'll always know where your money is, and you can get it out at any time. Online brokers don't avoid your calls. They're never "in a meeting." Any time, day or night, it takes a moment to find out exactly how much you've got and where it is invested.

2. You always know how you're doing, too. Performance figures are updated daily. You don't have to wait for the quarter to end, or rely on someone telling you. Mutual fund performance figures can't easily be fudged. And they are easy to compare to others, so it's harder to be snowed.

3. You have total control. You can choose exactly how to invest your money, and how much. No one will pressure you to follow "the smart money" into some new underwater condos fund. Regular mutual funds rarely demand you commit $1 million.

4. Everything is out in the open. Mutual funds have to publish regular updates, telling you what they've been doing and why. Mr. Madoff actually kicked people out his fund if they asked too many questions.

5. You can fire a mutual fund manager with a click of a mouse. Firing a manager you know personally is much harder – and avoiding it may cause you to wait too long.

6. You'll save a fortune on fees. Some money managers charge the earth – especially in those exclusive partnerships or hedge funds. Those costs will probably kill your returns over time. Few financial "wizards" and "miracle" funds ever live up to their billing anyway. The main people getting rich from hedge funds have been hedge fund managers.

7. You can still get all the diversification you want. Though regular mutual funds you can invest in hedge-fund like "market neutral' funds, managed timber, Asian real estate, precious metals, and option-selling income funds. You can keep your money in inflation-protected government bonds or Japanese yen. Exactly how much more diversification did you really need?

8. You'll gain valuable knowledge. These days it is pretty straightforward to find out how to invest your money sensibly. And it will give you a better idea of what's going on and what you might expect. Hand your money over to someone else, and you'll always be in the dark.

9. And when you keep your money in public funds you won't wake up one morning, switch on the news, and discover it's all gone. The worst one-day loss in history for investors who entrusted their money to the U.S. public markets is about 20%. It happened just once, October 19, 1987 – and they got their money back in due course.

10. And if you really need to brag about your money at the country club, an $8 online trade and a $3,300 stake can get you one share in Berkshire Hathaway. Then you can smugly say, "I have my money with Warren Buffett." Do you really believe your brother in law's "financial whiz" is any better?