Be a Smart Investor

When you meet with a financial advisor, they always tell you to look at the stock market and your investments over the long term. Often, a number tossed around is that a mutual fund you invest in today will return around 10% or more over the long haul, even if it has smaller returns or even negative returns in the immediate future. The message is clear and often repeated: Be patient, don't worry about the day to day performance of an investment vehicle, and everything will be fine.
This faith in the long term returns of investments is evident in the results of a nationwide survey taken last year that found investors expect the U.S. stock market to return an annual average of 13.7% over the next ten years. Financial experts paint a slightly different picture, however, of returns averaging around 6%, but no higher than 9%. Even these estimates seem a bit rosy, as inflation has historically eaten into average rates of return by about three percentage points every year, with taxes taking away another two points.

When all is said and done, these losses offset the potential investment gains by five to seven percent. With this in mind, investors and their advisors would have to pick investment vehicles which would generate 11-13% returns before costs were figured into the equation before even coming close to the expectations of the general public. So what are the actual rates of return? Well trusted figures show that U.S. stocks have earned an annual average of 9.8% with a long term net of only 4%. When you mix in bonds and cash, this net drops to a measly 2%.

The mythical rate of big long term returns leads people to save too little and put far too much faith in the stock market to provide an income for them later in life. This is a recipe for disaster in some cases for retirees who find themselves with too little cash in their portfolios as they enter their golden years.

What does this mean for the intelligent investor? Don't believe the hype -- especially whatever your financial advisor tells you. This doesn't mean that they are being unscrupulous, necessarily. As a rule, you need to ask questions as an investor to get the real information on whatever your advisor is pitching. If he or she says that your investment will reap long term rewards of 10% or more, ask what that number will look like after taxes and inflation, along with fees. They should be able to give you that net figure.

Not only will you be better informed, but you'll also have a clearer picture of exactly how well that particular investment vehicle is performing and will be able to determine how much money you should invest based on the net returns - forgoing the possibility of leaving yourself short should these investments be a substantial part of your retirement income.

Think of this information as a useful and much needed reality check. It's also a good reminder that you should always ask as many questions as possible about your investments before placing your hard earned money into someone else's hands. Don't' be embarrassed or afraid to get as much information on your potential and existing investments as possible, such as:

• Is this investment product registered with the SEC and my state securities agency?

• Does this investment match my investment goals? Why is this investment suitable for me?

• How will this investment make money? (Dividends? Interest? Capital gains?) Specifically, what must happen for this investment to increase in value? (For example, increase in interest rates, real estate values, or market share?)

• What are the total fees to purchase, maintain, and sell this investment? Are there ways that I can reduce or avoid some of the fees that I'll pay, such as purchasing the investment directly? After all the fees are paid, how much does this investment have to increase in value before I break even?

• How liquid is this investment? How easy would it be to sell if I needed my money right away?

• What are the specific risks associated with this investment? What is the maximum I could lose? (For example, what will be the effect of changing interest rates, economic recession, high competition, or stock market ups and downs?)

• Where can I get more information about this investment? Can I get the latest reports filed by the company with the SEC: a prospectus or offering circular, or the latest annual report and financial statements?

Source: U.S. Securities and Exchange Commission

written by REI Circle (www.reicircle.com)