To help ring in the new year, the Securities and Exchange Commission has published a list of 10 tips for investors. In so doing, the SEC may be stepping outside of its role as the nations top securities laws enforcer, but that role gives it a special vantage point, so let’s listen. The SEC’s list (presumably in order of priority), with some embellishments of our own, is as follows:
1. Get rid of debt, especially high-interest debt. You may not have needed an SEC tip for that, but it is undoubtedly good advice. Deleveraging is occurring all over the world as big financial institutions and individuals that borrowed to the hilt and beyond during the housing and financial markets bubble, slowly unwind those disastrous positions. Some estimates are that deleveraging will take a decade or more.
- Invest money you own (not borrowed money) regularly using dollar-cost-averaging. The SEC does not say what to invest in, but presumably it is talking about investing in the stock and bond markets. The SEC calls it paying yourself first. In other words, don’t spend it. Remember, though, that the SEC is not an investment advisor. Many Americans, especially those with a million dollars or more to invest, are not putting new money into stocks or bonds or mutual funds that hold stocks or bonds at this time.
- Keep a cash cushion. Cash cushion means “safe money,” e.g., bank accounts, certificates of deposits, and FDIC-insured money market accounts. Be skeptical of other investments that may be pitched as safe. Remember, Wall Street has wrongly pitched auction rate securities and numerous other investments as safe, cash-equivalent investments only to see such investments lose significant value.
- Diversify, diversity, diversify. Do not put a significant portion of your investable assets in any one security or sector of the market. Mutual funds are often touted as providing instant diversification, but many of them are not diversified, and some are dangerously overconcentrated.
- If your employer offers a defined contribution retirement plan, use it, especially if the employer offers matching contributions. Contribute at least enough to get your employer’s match.
- Spot red flags of fraud. Assurances of guaranteed returns, outsized returns, and little or no risk are “classic warning signs for fraud,” according to the SEC. Old sayings are meant to be said: If it sounds too good to be true, it probably is.
- Spot hidden charges. Like a pig rooting for truffles, you know they’re there. Don’t be gouged. Fees and expenses erode returns, and over time the erosion is significant. Go for low-cost investments, not “manager compensation schemes.”
- Teach your children about personal finance. The SEC says: “Recent research suggests that direct teaching by parents is an important predictor of a young person’s future financial success.” But first, take a refresher course yourself, revisit your own financial situation and put the basic principles into practice before you teach them.
- Do your “due diligence.” Don’t be swayed by a sales pitch. Research the investment itself (as well as the promoter). Avoid private placements (investments that are not traded on an exchange) unless you are truly equipped to perform a rigorous investigation yourself, because the firms that sell those investment often fall short of their claims of having performed due diligence.
- Check out the promoter’s disciplinary history. It’s free and easy. Just google “finra brokercheck” and “SEC investment advisor” and follow the prompts. In addition, contact your state securities regulator for information about a promoter or private investment. Just google “NASAA” to find your state regulator’s contact information.
Page Perry is an Atlanta-based law firm with over 170 years collective experience protecting investor rights and fighting Wall Street greed.