I try to break everything down to be as simple as possible, so here goes.  When you begin to consider investing, what is your starting point?  I begin with the most diversified, lowest cost approach.  That has been index-type investing for quite some time.  Setting aside the important discussion of how much to allocate among various indexes, the first question should be why would you do anything besides an index-type approach?

That simple question has led me on a quest that has lasted my entire career.  The answer led me to leave a career with a Fortune 100 company that created its own products in order to focus on a finding a better method.

If investors analyze the risk and return of their existing investment approach, I would be willing to bet that the vast majority would have been better off by simply investing in a diversified index-type approach.  Plenty of academic studies back me up on this.

I believe that there are some approaches that fine tune the concept of low cost diversification better than others, but a lot of time is wasted on finding some elusive “guru” who turns out to be a costly disappointment.

WHY ARE YOU USING YOUR CURRENT APPROACH?  HOW DOES IT PERFORM?

Part of the agreement we made was that my firm could not be an option, so I could be completely objective. Naturally I believe that my investment approach is superior, but I truly understand the need to have someone completely unbiased to help you evaluate alternatives. 

It is a shame that so many of the Madoff clients did not use this approach.  They relied on personal relationships and word of mouth to make their decision, and look what happened.

BE SKEPTICAL.  GET INDEPENDENT ADVICE.

Madoff produced his own client statements.  That is your first red flag.  You want as many independent parties involved as possible.  Our clients have their assets at an independent custodian, like Schwab or TD Ameritrade.  These institutions hold all client assets, and they provide independent statements to clients.  They also hold insurance policies to protect clients from fraud.

Clients of Madoff could not verify their investments from an independent custodian.  You want to be able to mutually agree to the investment plan with your advisor, and then see those investments in your account at your independent custodian.  Furthermore, it is even better if you hold publicly traded mutual funds or individual securities that mail you independent prospectus information so that you can further verify the validity of your ownership in those investments.

Lastly, Madoff claimed to employ various hedge fund techniques.  Many independent experts have publicly debunked his ability to successfully make these techniques work years ago and avoided being sucked in.  I suggest you seek simple, proven strategies that do not require a “wizard” working behind the curtain.  

The Fed has reduced rates and that means long term fixed rate mortgages are back under 6%. This is providing anyone who has a variable mortgage, who missed the last refinance opportunity, or who is purchasing a new home with the opportunity to take advantage of the lower rates.

If you or anyone you know could benefit from a discussion of the best way to manage their mortgage, please give me a call.

Currently, the S&P 500 is down about 18% from its 2007 peak, and the NASDAQ is down about 24%.

So one of the only useful things we can do at a time like this is to reevaluate our “true” risk tolerance level. When the market is going up, all of us are fine with maximum risk. It is only when the market declines that we get an opportunity to really see if we are comfortable with the risk we are taking.

How are you feeling right now? Are you still a believer in the fact that if you want the higher long term rates of return of the stock market, you will have to live through the inevitable market declines?