Financial Headlines Can be Misleading

Those reasons why markets go up or down are often pure fiction. There may be many reasons why the stock market has gone up or down but the financial headline writers manage to have an answer.

It is almost impossible to know after a trading day’s closing, the moods and sentiments that drove that day’s market, nor the supply and demand of securities over the global markets that would have had an impact.

Short of a major calamity or importantly market-impacting event, the media does not know. But is ready with answers, as if a market chrystal ball has somehow telegraphed some secrets to them.

Dodd-Frank Regulation and Hedge Funds

Hedge funds with assets over $150 million must now register with the Securities and Exchange Commission.

Hedge funds are actually a stabilizing factor in market trading, but a mostly inept media never gets this point across. Thus, politicians are able to pin blame for market problems on the hedgers.

Besides, the SEC has has had a rather poor record in checking out fraud in the past. They overlooked the Bernard Madoff fraud scandal until the damage was done.

Hedge funds tend to work off the extremes of the market. This keeps prices in line. Dodd-Frank however, did nothing but exaggerate the too-big-to-fail problem.

Financial Adviser Cost

Ask your advisers how they are being compensated. There may be a big difference between what they earn and what you pay them.

I am not only referring to the fact that they may be getting referral fees for recommending you as a client. That would be a conflict of interest harmful to your interests.

No, I am calculating actual cost.

You will pay the advisor’s fee, on the management of your assets, It can be1% to 3%, generally 1½%. That’s $1500 for every $100,000 they manage.

(But the asset-management fee may not be the only cost. Remember: You pay other charges, which include mutual fund and exchange-traded fund fees for management. And if you use a hedge fund, you may also pay about 20% or so of fund earnings.)

The problem is that these 1 1/2% management costs add up to a considerable chunk of your annual returns. After all, you’re lucky if you earn $6000, or 6% for each $100,000. The advisory fee, in other words, is 25%.

Insider Trading Rules

Despite occasional media reports of Wall Street types who have been caught for insider trading, the rules are not as simple as headlines would make them appear.

Many of the rules are vague. It’s easy to get caught for what was done in good faith. Often, those who are arrested and go to jail, are guilty merely of lying in one way or another in their testimony, but not for insider dealings.

What has been firmly established about insider trading is this:

An employee has an obligation to an employer not to divulge information received while on the job. You cannot trade on company secrets.

There is nothing illegal about trying to get information about a company in which you wish to invest, provided you don’t have someone break a law or a duty, to get at that information.

You can act on gossip and what you overhear from general discussions of others, who are not restricted in the dissemination of such information.

Public Debt as Family Debt

We will soon have over $56 trillion in unfunded public debt obligations. That is over $480,000 for the average family household. The figure mounts every day our legislators are in Washington.

That sounds worse when you figure that it is about ten times the average income of each American household. What is more, the amount grows because it is a debt that accrues interest.

And interest costs are bound to eventually grow enormously. Plus, the value of the dollar to pay debt back gets to be worth less as our obligations mount. With inflation, it may well triple or quadruple or go even higher.

Timing to Buy and Sell Securities

Selling securities at their high and buying at their low are everyone’s investment goals. Of the over 1600 strategies I evaluated along with their pros and cons, this could be basic.

The problem: The idea does not work in practice. Blame it on human psychology. Or the blur of constant financial news with new buying and selling suggestions. Or your need for occasional cash for urgent needs.

Research shows that very few professionals can time the market, except by accident.

Be especially careful with bonds because you are bound to get wrong information from “experts” about the risk of holding them during inflationary times. Investors generally get poor advice about the practical usage of duration principles, as a tool for bond profits during inflationary periods. ( See the Earl J Weinreb NewsHole® comments.)

So forget about any supposed ability to time the markets.

Adviser and Broker Regulations

Investment advisers are regulated by the Investment Advisers Act of 1940. Brokers are regulated by the Securities Act of 1934.

There had been a fine line distinction in the way brokers and advisers dealt with clients. Years ago, brokers were more likely to give advice than they do today. Commissions are much lower these days. And so much information is available online about securities.

Additionally, in theoretical terms, investment advisers are expected to have a broader view of the investment picture. After all, much of broker training has to do with securities law basics, rather than investment research. I find that in practical terms, investors ought to treat the differences academically, but also cynically.

However, under Dodd-Frank, the Securities and Exchange Commission wants to make brokers more responsible for information they give, treating them as fiduciaries. That may dry up that source of information.

On the other hand, advisory charges can amount to 25% and more of your investment income each year when you pay fees of 1½% or so on assets managed.