The difference in speculation and investing is not only risk and cost, but also common sense. It’s most likely due to lack of investment education by the public, but also preying investment professionals and whack media.
The two most disturbing mantras I’ve been associated with go something like this.
1. It’s a good investment, if and only if, it’s good for the company, good for the broker and good for the client…but 2 out of 3 ain’t bad.
This obviously calls for retribution, but nothing is ever done. What it means is that the client is the only one of the 3 taking risk, and if the brokerage firm makes money and the broker makes money, let’s only hope the client makes money, so they will come back for more. But if the client loses money, oh, well – 2 out of 3 making money is a win, win situation.
2. “YTB” – or Yield to Broker
This grossly used term describes when a broker makes astonishing commissions on risky investments. Yes, brokers get paid more to sell you higher risk investments., usually one too complicated for the average investor to understand. But, “if they like you and they trust you, they’ll buy it.”
The power of markets work. It’s been proven throughout history, it’s capitalism at it’s best. Speculation has a high degree of risk, at an even greater cost to the investor, both dollar cost and chance of losing the money they’ve invested.
The allocation of your assets, in other words, the proper mix of stocks, bonds, real assets and cash, determine your long-term expected return, not selection of each security.
Diversification, or spreading your investments over a wide array of asset classes in all sectors of the market is an essential counter measure in managing undue risk, without compromising performance. A diversified portfolio of smaller, undervalued companies with high profits will have a higher expected return. Investing globally, often provides a better return, at a given level of risk, than stocks and bonds alone.
This philosophy is based on Nobel Prize winning academic research and decades of practical experience, not speculation. A disciplined process, without stock selection, market timing, or Wall Street trends to guide decision-making, you can structure a diversified, low-cost investment portfolio to balance risk, lower taxes and maximize return.
So, why do most advisors take such a different approach. Is it not “sexy” enough? Is the profit margin too low? What happened to asking, “what matters most to you?” The fact is, too many corporations gorge on fear and greed and with a YTB (yield to broker) that pushes and pulls margins high enough to outperform every quarter, well, 2 out of 3 ain’t bad.
Charles Kochel has been a wealth manager since February, 1999. He founded Yield Wealth, the first benefit corporation in Arkansas and leads the charge for core impact investing in the south.
For more information about how to align your investments with what you believe in, email firstname.lastname@example.org. To learn more about Yield Wealth and our beliefs and capabilities, visit http://www.yieldwealth.com. The information in this blog should not be taken as investment advise.