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Are Stocks Too Risky?

This article was written by in Featured, Investing. 28 comments.


When it comes to investing for the future, there appears to be an interesting dichotomy. The typical financial advice marketed to the middle class — upper and lower — calls for long-term growth through investing in the stock market. The typical sales pitch — and I use “sales pitch” as a general term, not necessarily something you hear from a salesperson, but often you do — mentions or implies an almost guaranteed return of 8%, sometimes 10% or 12%, over any thirty-year period. For many people, the stock market is their only hope for collecting enough wealth for retirement.

For the most part, wealthy people have a different approach to building for the future. Owning companies and investing directly in businesses, when successful, are much more successful than investing in the stock market. Don’t forget that a lot of investors of this type fail or go bankrupt. Occasionally they continue trying until they become one of the success stories, but often, survivorship bias dooms them to oblivion forevermore. For those who succeed, once that wealth has been built, goals turn towards eventual retirement and the cessation of the hard work of diligent company-acquiring or fervent CEO-ship. It’s not the stock market for these folks, however.

One of my favorite examples is Suze Orman. She is one of the most popular television personalities, and she doles out financial advice on television, on radio, and in her books. She, like most other financial advisers and planners, looks towards the stock market for long-term growth — for those who have the stomach to sit through short-term volatility. Peek inside her own portfolio, and you might find a different story. Suze prefers investing the bulk of her wealth in super-safe municipal bonds, triple-A rated, rather than stocks. The information on Suze’s portfolio is now a few years old, and it’s quite possible she may have shifted her asset allocations and changed her diversification, but the information is relevant. In 2007, just 4% of Suze’s non-real estate portfolio was invested in stocks — at a time she was recommending an allocation of mostly stocks to callers her same age.

Of course, age isn’t the only consideration. 4% of Suze’s portfolio in 2007 amounted to $1 million, and that amounts to larger exposure to the stock market than most middle class workers. Though I’m sure she wouldn’t like to lose $1 million, she could certainly afford to. She can take this small amount of risk. She doesn’t need to build up towards retirement; Suze could retire today and live off bond income for the rest of her life.

In light of the volatility in the stock market following the earthquakes and tsunami in Japan, analysts are saying the stock market is now too risky for investors. The risk doesn’t change depending on market condition, however. The risk has always been there. There is some kind of association in the bran that makes people think that when stocks are going up, stocks are the best methods of building wealth, while when stock markets are volatile, they are bad. The equity market doesn’t change characterization overnight. The same rules apply — there is always risk in the stock market. Those who can afford to take the risk do so appropriately. Others who believe the stock market is their only hope for a comfortable retirement invest because, thanks to the financial planning industry, they believe they must. Those who don’t want to take this type of risk run companies and acquire businesses. There is risk in that, as well, and in fact those who do are often more exposed, but most have determined that bouncing back is possible and are willing to put the work in the promise for greater returns than the stock market and, perhaps more importantly, never being required to put the bulk of their money at risk again.

Do you believe that owning companies and investing in businesses is a better way to prepare for retirement than investing in the stock market, even index mutual funds? Is the stock market just too risky today?

Photo: Cyron

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Calming Facts About Identity Theft

This article was written by in Credit. 12 comments.

If someone successfully applies for a loan or a credit card using your identity, there will be a big mess to clear up. I don’t want to downplay the hassle, there. I would be extremely annoyed if that happened to me.

However, what we hear on the news and especially in commercials for services like LifeLock (lots of lawsuits) and FreeCreditReport.com (misleading at best) is inundating us with fear that it’s almost a given that it will happen to us. The truth is, financial identity theft becomes less likely to happen to any one person with each passing year. From Wikipedia:

Identity theft complaints as a percentage of all fraud complaints decreased from 2004-2006. The Federal Trade Commission reported that fraud complaints in general were growing faster than ID theft complaints. The findings were similar in two other FTC studies done in 2003 and 2005. In 2003, 4.6 percent of the US population said they were a victim of ID theft. In 2005, that number had dropped to 3.7 percent of the population.

When listening to people tout statistics, keep in mind also that “identity theft” is a broad category that includes financial identity theft. They’re both awful, and I hope it never happens to you, but you don’t have to feel like forking over $10 a month for identity theft protection is necessary. You certainly don’t want to publish any sensitive information in the newspaper like Jeremy Clarkson did, but you should be fine with shredding anything that has, say, a promotion code, or your name already printed on it.

Here’s an excellent resource from the FTC.

And incidentally, why do the FreeCreditReport.com commercials hinge on the fact that if my credit is compromised, I won’t be able to get a good job? What does my credit report have to do with my résumé?

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FreeCreditReport.com is a Scam!

This article was written by in Consumer. 309 comments.

Updated: Get Out of FreeCreditReport.com’s “Triple Advantage”.

This isn’t the first time, but now the State of Florida Office of the Attorney General is investigating FreeCreditReport.com. You’ll notice I don’t link to the site. This site, run by credit reporting agency Experian is taking advantage of the ruling that anyone can receive a free annual credit report from each of the three major agencies.

FreeCreditReport.com is not the website that offers free credit reports in conjunction with this directive. It’s misleading, and here’s the fine print on the site:

When you order your free report here, you will begin your free trial membership in Triple AdvantageSM Credit Monitoring. If you don’t cancel your membership within the 30-day trial period, you will be billed $12.95 for each month that you continue your membership. If you are not satisfied, you can cancel at any time to discontinue the membership and stop the monthly billing; however, you will not be eligible for a pro-rated refund of your current month’s paid membership fee.

FreeCreditReport.com has been investigated by the Federal Communications Commission (FCC) and has been required to pay a significant penalty. However, they apparently have been allowed to keep operating.

The only way to get your free annual credit report is by going through AnnualCreditReport.com.

If you have already exhausted your free annual report, you can sign-up for a 7-day free trial at GoFreeCredit.com. You’ll receive three credit scores and well as three credit reports (with an easy option to cancel if you choose not to keep the trial membership), access to your scores each month and daily credit monitoring to help protect your Identity and Credit.

Hat tip to Red Tape Chronicles for the news about the Florida AG investigation.

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