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No sure things

By DONALD G. FELL

© St. Petersburg Times, published March 8, 2001


"My husband and I were having dinner one evening when this nice, polite gentleman called on the phone to tell us about an investment he thought we would like to make. Since it was such a unique opportunity to get such a high return on our money, he could only offer it to a limited number of people for only the next few days. I spoke to the gentleman for a few more minutes, then told him I wanted to tell my husband about this great opportunity being extended to us. My husband and I both agreed that the investment did sound very good and that we would put a check in the mail the next day. That was the last time we saw our $50,000 or heard from this nice gentleman. We lost it all."

-- Elderly Florida participant in a Fort Lauderdale town hall meeting for investors in 1997

* * *

"I lost over $260,000 all because a friend of mine told me about a friend of hers who could get me into this investment where I could make a great return on my money in a very short time."

-- Elizabeth D., Florida

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"The sheriff had to evict me from my house because I could no longer pay the mortgage. I lost everything I invested, all because I took the advice of a financial adviser who treated me as her friend and told me she would take care of my money for me."

-- Sarah D., Florida

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photo
[Times art: Teresanne Cossetta]
All of the above are excerpts of true stories, told to those responsible for regulating the securities industry in the United States and in Florida. The saddest fact about these stories is that none of them had to occur. The people making the investments, individuals just like you and me, made mistakes with their money -- very serious mistakes.

As people move through the stages of their lives, they will have varying amounts of money to save and invest. Initially, the amounts will usually be rather small. The older people become, and the less financial responsibility they have for paying expenses -- such as orthodontic treatments, purchase of a car or college tuition for their children, or making their own mortgage payments on their home -- the more discretionary money they will have. With more money to spend however they wish, many people will begin investing their money in the hope that it will make more money for them.

Investing is a subject many Americans don't understand -- that is, until it is too late.

Investing means we take some of the money we receive, primarily through our paychecks, and put it in such things as certificates of deposit, stocks, mutual funds, government or corporate bonds, annuities or a variety of other such products.

An important lesson for everyone to learn is that investments are not all the same. Investments do not all offer the same level of safety or return, and not every investment opportunity is for everyone. In fact, some investments are set up so that the only person making any money off the investment is the person selling it, not the person making the investment.

When we do have an opportunity to invest, we have a responsibility to ourselves. That responsibility is to understand what we are doing with the money we have worked so hard to get. It is our money, and we must understand that we are the ones saying "yes" or "no" to an investment. We are not making an investment just to please either a friend or a financial adviser. We are making it for ourselves, and it must be something we understand and that we know will help us meet our investment goal, whatever that might be.

So, to provide you with some basic dos and don'ts of investing, please consider the following rules, regardless of whether you have $100 or $100,000 to invest:

You should do the following:

Get as much information about firms and their sales agents, commonly called financial advisers, as possible. Ask about the financial adviser's educational background, how long he or she has worked for the firm, the number of clients served, where the adviser worked previously and for how long.

Make sure an investment is suitable to your financial situation, realizing that over your lifetime your financial situation will change.

Understand the risks involved. All investments have risks; however, some have more risk than others.

Ask about fees, sales charges, commissions, penalties and any other costs you might have to pay. Different types of investments may mean you have to rely on the advice and assistance of someone in the financial securities industry. His or her services may involve fees; however, make sure you clearly understand what you are getting for these charges. If you are not comfortable paying these charges, do not make the investment.

Find out if access to your money will be restricted once you make your investment. And, along with this, also find out if there are any other charges applicable if you want to access your money or cash in the investment.

Take your time in deciding on an investment. A sound investment will be just as good tomorrow. If a financial adviser tells you this is a "limited time offer," be skeptical of the investment. There is probably a reason the offer is "limited," and it may not be one you would approve of.

Document all transactions and keep your documents in a safe place.

The following are the don'ts:

Don't fall for slick presentations and smooth talkers. Also, be aware that expensive clothing or offices with impressive framed degrees or certificates do not guarantee the truthfulness, integrity or competence of an adviser.

Don't accept "cold calls" from strangers. Just ask yourself: "Why is this person making me such a good offer when he doesn't even know me?" If it were so good, wouldn't such advisers be calling all their friends first?

Money Stuff: Get it! Spend it! Keep It!

Introduction and previous chapters

Don't believe claims of "guaranteed high returns" or "no risk" investments. Ask yourself: "Just how much risk am I willing to assume in the hope of making a high return?" Also, clearly understand that high risk investments might actually return nothing, and that you could lose all of your original investment.

Don't pay any advance fees as a precondition to an investment. Simply put, you may never see your fee again, and there is no guarantee you will ever see the investment.

Don't give in to high-pressure sales tactics that will rush you to make an unsound decision. Keep in mind that most good investments today will still be good investments tomorrow. That will give you some time to do your homework to find out just where you might be putting your money.

Don't sign any documents you do not fully understand. Keep in mind the old saying, "There is no such thing as a dumb question." This is certainly true regarding your money. Chances are that if you can't understand where you are putting your money, you probably shouldn't be putting it there.

Don't rely on "inside information," "hot tips" or "rumors." Just ask yourself: "Why would I spend more on a "hot tip' investment than I might spend on a car that I researched for a long period of time?"

Don't put all your money in one investment. Spread your risk, and if your financial adviser isn't comfortable with that philosophy, you might want to get the opinion of another financial adviser.

Investing is serious business. It is about our money and how it will grow to meet our needs in the future. Investors have a responsibility to know what to do and what not to do in investing their money, however large or small the amount. It is a lesson better learned early than too late.

Remember, if something sounds too good to be true, it probably is.

Do's

don'ts

For additional information

The Office of the Comptroller, Department of Banking and Finance for the state of Florida, regulates, oversees and monitors securities firms, financial advisers and various types of investments. It can be contacted toll-free at 1-800-848-3792 or online at http://www.dbf.state.fl.us.

The U.S. Securities and Exchange Commission is charged with protecting investors and maintaining the integrity of U.S. securities markets. It can be contacted online at http://www.sec.gov.

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Donald G. Fell is president of the Florida Council on Economic Education. He is also a member of the executive MBA faculty in the College of Business at the University of South Florida and of the national faculty of the Foundation for Teaching Economics, based in Davis, Calif. Before moving to Florida in 1984, he served as president of the Ohio Council on Economic Education and taught economics at Ohio State University in Columbus. Chapters on the securities industry have been reviewed by the Florida State Comptroller's Office, which is responsible for protecting consumer rights in the securities industry.

About the Florida Council on Economic Education

Money Stuff was developed by the Florida Council on Economic Education and project director Fonda Anderson. The council is a statewide non-profit organization founded in 1975 to educate K-12 teachers and students about the free enterprise system and to instill in them an appreciation for a market economy. For more information on the council's programs for teachers and students, please call (813) 289-8489.

About Newspaper in Education

The St. Petersburg Times devotes news space to NIE features throughout the year, including this classroom series. The Times' NIE department works with local businesses and individuals to enrich the classroom experience by providing newspapers, supplemental guides and educational services to schools in the Tampa Bay area. To find out how you can become involved in NIE, please call (727) 893-8969 or (800) 333-7505, ext. 8969.

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