Bringing Financial Reform Closer to Home
Forecasts & Trends

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1.  The Concept of Personal Financial Reform

2.  What No Reform Act Can Do for You

3.  Conclusions


Since the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) was signed into law by President Obama just a couple of months ago, most recent articles about this legislation have concentrated on little-known provisions that are now coming to light.  However, most of these discussions are far-removed from the real world experiences of most investors.

There’s no doubt that the bear market spawned by the recent financial meltdown decimated many investors’ nest eggs.  To the extent that Congress passed a law that will supposedly prevent future debacles like the one involving subprime mortgage loans, then investors may rest easier.  However, individual investors are also faced with issues that may never be covered by federal law.  For example, the Dodd-Frank Act cannot repeal the business cycle (ie – recessions), prevent future bear markets, correct all bad habits or protect investors from every unscrupulous person claiming to be a financial advisor.

This week, I’m going to bring the idea of financial reform closer to home.  I’ll discuss various habits and tendencies of investors that often lead to negative consequences, and what you can do about them.  As I go along, I’ll be referencing a number of Forecasts and Trends E-Letter articles from the past, so this will be a good issue to pass along to family and friends who may be looking for some basic financial advice without a product sale tied to it.

What No Financial Reform Act Can Address

What follows are some very general discussions about issues that can negatively impact investor portfolios, but which are not likely to be prevented by legislation of any kind.  One common denominator you will notice is that these issues all require you to take some protective action in order to avoid unfavorable consequences.  The clear implication is that investing is not a spectator sport.

The observations below come from my own 30+ years of experience helping investors meet their financial goals.  Over the course of my career, I have found that there is no amount of government-based financial reform that can:

Make you financially literate.

In my June 22 E-Letter, I wrote about a study performed by Dr. Annamaria Lusardi showing widespread financial illiteracy among American adults.  Some readers didn’t like the use of the term “illiteracy” as it brings to mind fictional images of backwoods denizens with little formal education.  However, whether you call it illiteracy or lack of being informed, the results are the same.

Dr. Lusardi’s research has shown that ill-prepared investors make a variety of mistakes that can negatively affect their investment performance, including failing to plan for future financial goals, having no understanding of the effects of inflation and the failure to recognize the need to diversify one’s portfolio.

The Dodd-Frank Act did recognize the need for financial knowledge by establishing the “Office of Financial Literacy” to help educate consumers.  Aside from the laughable irony of a deficit-spending, debt-laden government taking on the job of educating consumers in financial matters, there’s little hope that this new agency will meet its mandate.

Gary D. Halbert, ProFutures, Inc. and Halbert Wealth Management, Inc.
are not affiliated with nor do they endorse, sponsor or recommend the following product or service.

After all, the Internet is replete with financial education and most major financial firms offer basic financial educational materials, some of which have been reviewed by federal and state regulators.  The issue isn’t the lack of available information, it’s the lack of will on the part of consumers to seek out this information before making major financial decisions.

As noted above, my June 22 E-Letter offered readers a chance to take one of Dr. Lusardi’s tests to determine their level of financial literacy.  I’m very pleased to report that almost all of my readers did extremely well on the test.  The obvious implication is that a regular diet of financial information can increase financial literacy.  If you missed being able to take the financial literacy test we provided back in June, click on the following link to access this simple, five-question quiz.

Make you save more money and/or reduce debt.

I have often repeated the finding that apprx. 70% of our economy is based on consumer spending.  Thus, it’s almost un-American to suggest that households should consume less and save more.  However, increased saving is the best way to approach your financial goals.  The markets have shown that returns are unpredictable, and sometimes negative.  Thus, the only part of the equation that is in our control is how much we save.

Closely coupled with this concept is the idea of eliminating debt.  Americans have been on a steady diet of debt to finance consumer expenditures for decades.  When you think of debt as negative savings, you see that many US households are having to “get back to zero” before they can realize any net increase in savings.

Long ago, I learned the guideline of paying yourself first, meaning that you set aside savings from your paycheck before paying any bills or discretionary spending.  The rule of thumb used to be setting aside 10% of pay, preferably over and above amounts contributed to your 401(k).  Sadly, the savings rate in the US has been far below that level for a long time.  In fact, the savings rate even turned negative in 2006.

Spending wealth generated by the stock market bubble of the late 1990s or the real estate bubble of the early 2000s is the antithesis of savings.  Not only does it mean living paycheck-to-paycheck, but the values of these assets are depleted.  Then, when the bubble bursts, you’re left with lower asset values, no savings and maxed-out credit cards.

I have a rule that is akin to one attributed to Warren Buffett.  While Mr. Buffett’s rule relates to avoiding investment losses, mine relates to saving:  Rule #1 – Save more money.  Rule #2 – Don’t forget Rule #1.

Make you read important disclosures.

As I noted above, the federal government will be taking on a greater role in providing financial education.  However, the government has already been very active over the years in trying to help investors make good decisions.  Many of these efforts have been in regard to making sure that sponsors of financial products and services provide comprehensive disclosures detailing every aspect of the investments.  The only problem is that few investors ever read them.

I’m sure we’ve all been faced with a half-inch thick prospectus document on thin paper full of legalese in small print.  While these disclosures are typically very complete, they’re not easy to digest, though they can be a sure-fire cure for insomnia.

A real-life example can be found in an actual call taken by one of my staff.  An investor wanted to know if we were aware of an insurance product that guaranteed 8% interest for 10 years.  The story was that if you put in $250,000, you would have $540,000 in 10 years and you could then draw $27,000 per year in income for life.

While we were unaware of the particular product involved, my staff member went to the Internet to search for information on the product.  He found a blog where this exact contract was being discussed.  Without going into a lot of detail, the participants in the blog were able to highlight features of the annuity that made it much less attractive, but were not recognized by our client.

So, how did these blog participants know about these potential negative aspects of the annuity?  They got them from the insurance company disclosures describing how the contract worked.  In other words, the information was readily available to the investor, but he had not taken the time and effort to read and understand the disclosures.  All he saw was the 8% guarantee.

Always, ALWAYS, ALWAYS read the disclosures that come with most investments.  In fact, be careful if an investment has no disclosures or prospectus.  Virtually all regulated investment sponsors are required to disclose certain material, so be wary of any investment sponsor who claims to be “unregulated” or that there are no disclosures required.

Keep you from making emotional investment decisions.

Emotions are part of being human, so how can we divorce ourselves from them when making investment decisions?  I’ll have to admit that it’s often quite difficult, if not impossible to do for many people.  However, I have written numerous times about how the Dalbar organization and others have documented that investors’ emotions can be their worst enemies.  See my November 3, 2009 E-Letter for more information about the findings of the Dalbar studies over the years.

For example, Dalbar has consistently found that investors will chase returns and then sell out at a loss when the hot investment turns cold and loses money.  The emotions of fear and greed are very strong and control many investment decisions.  Of course, it doesn’t help that investment sponsors also know the power of fear and greed and often attempt to use these emotional triggers in their promotional materials.

A more recent phenomenon related to the emotional reaction to fear is that some investors have chosen to never set foot in the stock market again.  One of our staff members told me of a neighbor of his who said he wants to try to make his money back from the recent bear market, and then he says he’s “done” with the stock market forever.  Considering the mountain of investor cash either on the sidelines or in bonds and bond mutual funds, I’d have to say that this guy has a lot of company.

This neighbor’s statement has two areas of concern.  First, there’s the idea of getting out of the equity markets forever, thus forfeiting any chance for meaningful growth in the future.  Most Investment Advisors agree that even retirees should maintain some exposure to stocks in their portfolios, so a fear reaction to stay in cash or short-term bonds could mean running out of money in retirement.

A second concern in this neighbor’s comment is that he wants to make it back to break-even before getting out of equities forever.  Unfortunately, this sometimes means that greed takes over and investors take on more risk than they should to “make it all back.”  In fact, after both the 2000–2002 and more recent 2007–2009 bear markets, we had many investors asking us how they could quickly restore their portfolio losses.  This is a self-destructive emotional decision as it could lead to even greater losses in the future.  It can also lead to being susceptible to investment scams as I will discuss in greater detail later on.

Some investment sponsors are now using the term “guarantee” to help allay investors’ fears.  In the annuity example above, the guarantee was a big reason why the investor was drawn to the product.  Just remember that guarantees always come with strings attached, especially ones that are providing greater than market-rate returns.  The companies sponsoring these products do not plan to lose money, so they have incorporated ways to protect themselves.  You must discover what these restrictions and limitations are, and then decide if the guarantee is worth the price.

A final emotional trigger is not actually an emotion at all, but rather the result of warring emotions.  We call it “investment inertia,” and it happens when investors stay in non-performing or unsuitable investments because they lack the knowledge of what action to take.  Sometimes, investment inertia stems from what we have labeled “analysis paralysis,” where so many conflicting ideas cause the investor to freeze, thinking that it’s better to make no decision than make a wrong decision.

The problem is that making no decision is actually making a decision to stay where you are, whether it is in cash or invested in the markets.

Seeking out the help of an investment professional such as an Investment Advisor is usually an excellent way to overcome the emotional stress related to making investment decisions.  Whether you call my firm or a local Advisor, an objective viewpoint with your best interests in mind can be a welcome resource for investors who want to overcome their emotions.

Prevent scam artists from preying upon hapless investors.

On this item, you may be saying, “Wait a minute!  Scams should be addressed by reform legislation.”  You are correct, except that fraud and theft have been against the law for a very long time.  Writing new legislation to address financial frauds and scams won’t make them any more illegal, or any more likely to be curtailed.  Only an financially literate public can put an end to them.

Gary D. Halbert, ProFutures, Inc. and Halbert Wealth Management, Inc.
are not affiliated with nor do they endorse, sponsor or recommend the following product or service.

Yahoo Finance recently published an article entitled “Scams: A Sucker Retires Every Minute.”  The article recounts how retirees are now being increasingly targeted by scam artists, some of whom are elderly themselves.  According to the nonprofit Investor Protection Trust, one out of five Americans over age 65 has been the victim of a financial scam of one kind or another.

As more and more Baby Boomers retire with too little money to last their lifetimes, scam artists will be even more active in separating them from what money they do have.  Unfortunately, many scams are based on legitimate investment and planning techniques such as annuities, reverse mortgages and principal-protected notes.

For example, a retired couple may be convinced by a scam artist to take out a reverse mortgage on their home, which is a perfectly legitimate transaction.  However, instead of using the money to increase monthly income or pay off debts, the fraudster has the couple invest in a bogus investment and steals the money.  In the end, the couple is in much worse shape than when they started and the scammer moves on to the next victim.

I have written about scams and scam artists many times over the years.  The most recent was in my January 19 E-Letter that focused on Ponzi schemes and other fraudulent investments.  Some readers may tire of reading periodic articles about investment scams, but as long as there are increasing numbers of victims of these schemes, I’m going to do my best to keep educating my audience about their dangers.

A good example of what to watch out for just occurred in our local market.  Recent radio ads by an Austin-based firm advertised guaranteed 8% returns on investments.  Investors’ money supposedly would be pooled and loaned out at 12%, so the investors got 8% and the promoter got 4%.  However, an article this week in our Austin newspaper noted that the Texas State Securities Board has now accused the firm of fraud and reportedly shut down the operation.  Of course, we don’t yet know if this firm will ultimately be found guilty of wrongdoing, but it does illustrate the potential danger of chasing guaranteed returns that are much higher than market rates.

Always remember – if it looks too good to be true, it probably is too good to be true.  Also, be wary of investments offering guarantees of principal and/or returns, especially if the returns are higher than prevailing rates on certificates of deposit.  Dig into the information to find out just who is offering the guarantee and how stable that entity is.  Also beware of firms that claim to be unregulated or who brag about “flying under the radar” of the regulators.  They might just fly away with your money.


While the passage of the Dodd-Frank Act was big news in relation to the largest firms in the financial industry, it’s still important to know that at the individual level, you are still your own best source of protection for your investment portfolio.  As I noted earlier, each of the various items discussed in this week’s E-Letter requires some action on your part in order to “reform” your investment experience.

Failing to take advantage of the many sources of investment information and counsel available on the Internet and through financial professionals can be a recipe for disaster.  However, be aware that many sources of information on the Internet and elsewhere come to the conclusion that passive asset allocation strategies are the answer.  You shouldn’t be passive in regard to your investments any more than you are about your politics or religion.

In no other area of our lives are we taught that inaction and ignoring risk is the best course of action.  Virtually every investment offering is accompanied by the caveat, “Past performance is not necessarily indicative of future results.”  Yet Wall Street’s conventional wisdom’s most frequent advice is for investors to just hold on during down periods and the market will surely recover in time to meet your financial goals.  Anyone who has lived through the last 10 years knows that this advice is not necessarily true.

A growing amount of evidence is beginning to show that the most effective portfolios are those that include a diversity of investment strategies as well as stock and bond asset classes.  Strategies such as managed futures and alternative investments have long shown their tendency to reduce portfolio volatility and provide added potential for gains.  Why do you think so many pension funds, endowments and other large institutional investors include these strategies?

I mentioned earlier that almost all of the readers of my E-Letter scored well on the financial literacy test featured in my June 22 E-Letter.  For that reason, I want to make it easier for others to enjoy the benefits of my weekly analysis of how economic, investment and political issues can and do affect your investments.

I have waived my copyright on this issue of the Forecasts and Trends E-Letter so that you can forward it on to anyone you like.  Perhaps you have family members who could benefit from knowing more about the economy and investments.  You might even have friends and co-workers who could also benefit.  Just forward them this E-Letter and suggest that, if they like what they read, they should come to this Conclusion section and click on the free subscription link below:

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Once they click on this link, we will send them an e-mail to confirm their subscription request as well as make sure that we are listed as an approved domain on any spam filters they may use.

As we venture further into uncharted waters of federal spending and debt, I think it’s vital that as many Americans as possible be aware of the economic and investment implications of government policy.  As a loyal reader, I know that you share these concerns, so let’s get the word out to as many of your friends, neighbors and family as possible.

Very best regards,

Gary D. Halbert


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"Gary D. Halbert, ProFutures, Inc. and Halbert Wealth Management, Inc. are not affiliated with nor do they endorse, sponsor or recommend any product or service advertised herein, unless otherwise specifically noted."

Forecasts & Trends is published by ProFutures, Inc., and Gary D. Halbert is the editor of this publication. Information contained herein is taken from sources believed to be reliable, but cannot be guaranteed as to its accuracy. Opinions and recommendations herein generally reflect the judgment of Gary D. Halbert and may change at any time without written notice, and ProFutures assumes no duty to update you regarding any changes. Market opinions contained herein are intended as general observations and are not intended as specific investment advice. Any references to products offered by Halbert Wealth Management are not a solicitation for any investment. Such offer or solicitation can only be made by way of Halbert Wealth Management’s Form ADV Part II, complete disclosures regarding the product and otherwise in accordance with applicable securities laws. Readers are urged to check with their investment counselors and review all disclosures before making a decision to invest. This electronic newsletter does not constitute an offer of sales of any securities. Gary D. Halbert, ProFutures, Inc. and all affiliated companies, InvestorsInsight, their officers, directors and/or employees may or may not have investments in markets or programs mentioned herein. Securities trading is speculative and involves the potential loss of investment. Past results are not necessarily indicative of future results.

Posted 09-28-2010 3:10 PM by Gary D. Halbert