I’m to sexy for my money!
By Melvin J. Howard
In this atmosphere of dwindling portfolios, bank crashes, funds imploding and less then honest money managers like Bernard Madoff . The not quite rich enough and not quite smart enough, certain investing class has for years paid through the nose for what was thought to be world-class money management by investing in funds that promise access to the best hedge funds. The Bernard Madoff scandal now calls into question the value of the so-called fund-of-fund industry. It seems some advisors did little more than turn over most or all of their clients' money to Madoff money that may now be gone. What’s a family office to do? For one always have full control of your money and your investments. Be involved with your money on a daily basis. If an investment, mutual fund, or hedge fund seems like something fishy is going on, get out of it. Never set and forget your investments, assuming that it will taken care of and your finances are on autopilot. It’s your family’s money, and you make the final decisions on the investments. If it seems too good to be true, it probably is too good to be true. Many investors were lured into the returns that this fund was boasting, so they put much of their nest egg in one basket. We all have gut feelings, and if your gut feeling says something isn’t right about a certain investment, then stay away from it. Your gut is probably right. Diversify, Diversify, and Diversify. So many investors forget about this crucial key to investing. Diversifying your portfolio is finance 101, yet so many people disregard it.
Family Offices play an essential role in their investment strategy of wealthy families. They often manage the family financial portfolio and often provide other services, such as handling children's college applications, hiring domestic staff or managing the family fleet of jets. The catch 22 is family offices do not typically manage family funds directly, Instead, they set the strategy and work alongside banks and other investment managers to safeguard and grow the family portfolio. Partnering with a private bank gives you better access to information technology. But that’s still not enough intelligent people have long been ruined by frauds. Psychologist Stephen Greenspan, who specializes in gullibility, explores why investors continue to be swindled -- and how he came to lose part of his savings to Bernard Madoff. Extraordinary Popular Delusion and the Madness of Crowds" -- most notably on investment follies such as Tulipmania, in which rich Dutch people traded their houses for one or two tulip bulbs. In his new book "Annals of Gullibility," based on his academic work in psychology, he propose a multidimensional theory that would explain why so many people behave in a manner that exposes them to severe and predictable risks. This includes himself: After he wrote the book, he lost a good chunk of his retirement savings to Mr. Madoff, so he writes on the most personal level. The basic mechanism explaining the success of Ponzi schemes is the tendency of humans to model their actions -- especially when dealing with matters they don't fully understand -- on the behavior of other humans. This mechanism has been termed "irrational exuberance," a phrase often attributed to former Federal Reserve chairman Alan Greenspan (no relation), but actually coined by another economist, Robert J. Shiller, who later wrote a book with that title. Mr. Shiller employs a social psychological explanation that he terms the "feedback loop theory of investor bubbles." Simply stated, the fact that so many people seem to be making big profits on the investment, and telling others about their good fortune, makes the investment seem safe and too good to pass up. We think because someone is famous, they must be smart.
By investing alongside them, we must be smart, too. The aura of prosperity expands to include us by association. Famous families are not immune to fraud. Entertainers, including sports figures, are often targets just for their name-recognition that’s value to the crook. In Mr. Shiller's view, all investment crazes, even ones that are not fraudulent, can be explained by this theory. Two modern examples of that phenomenon are the Japanese real-estate bubble of the 1980s and the American dot-com bubble of the 1990s. Two 18th-century predecessors were the Mississippi Mania in France and the South Sea Bubble in England (so much for the idea of human progress). Discretion is critical for family offices and their employees managing the fortunes of families whose wealth might be put at risk. Sometimes bigger is not always better and following the Jones is not the right thing to do!
