Investment 101

Planning your financial future

Four years out from the Great Recession, the economic meltdown of 2008, and many people still find themselves financially underwater. While unemployment seems to have leveled off, it has settled at a historic high rate. Credit card debt and home foreclosures continue to climb and basic college education has reached beyond the tipping point of affordability. Post-graduate work almost literally requires people to mortgage their futures.

So the smart decision is also old advice: people need to make their money work for them. The way to do that is through careful investing. Many, if not most, people don’t know the difference between a stock, bond, annuity or T-bill. So what is the not-so-savvy investor to do? First, turn to Investing for Dummies from the de rigueur series for everything from gardening to medical care. This sage advice is from Stock Investing for Dummies, 3rd Edition by Paul Mladjenovic:

  • Anytime you invest, you’re not buying stock; you’re buying a company.
  • The primary reason to invest in a stock is because the company is making a profit.
  • Stocks should never be 100 percent of your assets.
  • Depending on the nature of the market, sometimes stocks aren’t a good investment at all.
  • Using your common sense and logic can be just as important in choosing a good stock. Also, rely on the advice of an investment expert.
  • Have intelligent, well-reasoned answers to why you are investing in stocks, especially the particular ones you choose


Besides stocks, investors have a range of financial instruments to choose from when looking to make money grow. One of the most popular of late is an annuity, a retirement product that may be used to help increase savings, protect savings or generate a stream of income. Why look into annuities? Baby Boomers with little or no pension, or who find their pensions threatened by the economy, and who have most of their money in low-interest savings accounts, may find annuities key to a secure and comfortable retirement.

Bonds and bond funds tend to be among the safest and most reliable investments to ensure an ample and dependable retirement income. They are essentially loans to governments or corporations lent for a certain period of time. Because they are set at a fixed interest rate, they can help offset the risks and the price fluctuation of stocks.

Investors also can trade in real goods like corn, gold, pork bellies and the like, otherwise known as commodities trading. Because the art of making money grow can be tricky and speculative, it’s not a bad idea to rely on an expert. That’s where a financial planner may literally come to the rescue.

“This is very important,” says Jack Selber, a Registered Investment Advisor. “There is a big difference between a financial planner and an investment advisor. People bring me money as an investment advisor, and I manage it, but I don’t sell products like life insurance or do estate planning or things like that.”

Financial planners, on the other hand, attend a broad spectrum of a client’s financial life — saving, investments, insurance, taxes, retirement, and estate planning — and help develop a detailed strategy or financial plan for meeting a variety of financial goals. Until the financial collapse of 2008, the differences between brokers and financial advisors had essentially been a “tomato”/“to-mah-to” distinction for most consumers. Then when the meltdown began, some people found themselves in investments they didn’t want to be in and the Securities and Exchange Commission sought to point out the actual huge differences between financial planners and brokers.

Financial planners have a duty to put client needs above all and to disclose any conflicts of interest. While most brokers are good people who would do the same, they are not required to do so. Their only duty is to recommend suitable investments. A broker may recommend an investment that’s suitable and would net them a high commission. There may be another comparably suitable investment for the client, but which pays a much smaller commission for the broker. He is under no obligation to even mention it to the client, where a financial planner is duty bound to do so.

When looking for investment advice, Jack says it’s important for people to first determine what clients really need. “If they need planning, then what kind? If it’s estate planning, they need someone who specializes in that. It’s key to match what somebody is looking for to the services the professional is providing.”

Registered Investment Advisors have to enroll with an agency like FINRA — Financial Industry Regulatory Authority — or the Securities and Exchange Commission. While both organizations’ missions include protecting the integrity of the market and investors, they can only sanction or suspend investors. They cannot insure against financial losses even if the losses are due to fraudulent practices. So how does one go about selecting a good financial expert?

Jack says that asking for references is a good first step. “It’s a good idea, but you can’t put too much weight on the references since the planner provides them; however, there are questions you can ask to get a good idea of what kind of professional you’re dealing with. For example you could ask that person how responsive the professional was to problems. Was there a lot of turnover in the agency during the person’s interaction with the agency? Are these people easy to get in touch with?” Jack says.

In selecting a planner, there are buyer-beware type issues a consumer should consider. A major one to look for, Jack says, is who is going to have custody of the assets. “You don’t want to give someone discretion to invest and also custody. Custody should always be with a third-party. The other thing is to realize that nobody has a magic bullet,” Jack says. “Pretty much everyone is selling a product that their company has put together. If someone guarantees a certain rate of return, that’s a red flag. If they tell you they can get a certain percentage of return without any risk, that’s a red flag. It is possible to do that with some insurance products, but then again you won’t have liquidity. So there is always a trade-off.”

Most financial planners as a rule put individualized investment plans in writing. If not, it is a good idea to request that. Jack says that’s an absolute. “In the agreement, you should put what you plan to do and what the risks are.”

In general, financial planners are knowledgeable across a broad spectrum of industry and investments. These can range from energy to technology to Real Estate Investment Trusts. If all the general reliability checks pan out, investors should trust their instincts in selecting an advisor. That said, Jack reiterates, “Most financial planners have a particular product that they will have in mind to fit your particular needs.”

After selecting an advisor, the next most crucial step in investing, and the lynchpin in many ways, is determining one’s risk tolerance, loosely defined as how well a person handles the uncertainty of investments and, in particular, the relative possibilities of losing money. Jack says there is no easy way, no real litmus test to finding it. “Some people don’t know what their tolerance is. People try to assess their investments on what they know or believe will happen, but few people have seen the stock market lose 45 percent of its value in one year, like it did in 2008. Some people had one risk tolerance before 2008 and now have a different one.”

After selecting a financial planner, an investor has but two other things to do: trust and verify. There are all sorts of tools for evaluating investments: price-to-earnings ratio, price-to-sales ratio, return-on-equity and debt-to-asset ratio. Investors can read a company’s annual report or its 10K and 10Q SEC filings, and it will most likely make them all the more worrisome and none the richer. “That’s what you pay the investment professional for. You want to come to an agreement. You do not want to have multiple goals. You want to keep things as simple as possible and then rely on the professional’s expertise,” Jack says.

But consumers should also verify the advice through routine and frequent communication. “You should review your plan with your professional at the very least annually. That’s also another aspect to examine when choosing your financial planner. You might ask the reference how often the planner uses email or sends newsletters. How often you communicate with your financial planner is probably one of the most important factors you can consider.”

There are two types of compensation models for financial experts: fee based or commission based. There seems to be no real advantage of one over the other, the selection depending largely on consumer preference. “I am a fee-based consultant, for example,” Jack says. “Our fees go up or down depending on how well we manage our clients’ funds. There’s no conflict of interest there. In commission-based transactions, once the transaction is over, the financial planner doesn’t have a viable interest anymore. That doesn’t mean the planner is not interested. It just means that he or she conducts one transaction at a time. Once you buy their insurance product, for example, the work is done.”

Probably the most important investing term to know is “diversification.” That means avoiding putting all the invested money in one basket. There is not a standard or suggested mix. Again investor preference is the biggest determiner of how to diversify. Most planners recommend a mixture of stocks and bonds. What about folks who want to form investment groups or invest with a partner? The risks in investing with a partner, especially one who is a family member, are enormous. “That’s basically what a mutual fund is,” Jack says. “Pool your money and share expenses. I think investment clubs where you talk about ideas, those are good, but as I said I think it is best to keep things simple.”