Monday, May 6, 2013

Inightful Intuition or Luck

Often when I write about a particular subject, whether it be via a tweet or on this blog, there is often confirmation of my views in major publications that follow. For example, I have been harping against Non-Traded Publc REIT's for years. These so-called investments are sold to individual investors who in most cases are not sophisticated enough to understand what they are buying. The other day, I read an article in the Wall Street Journal where the Financial Industry Regulatory Authority (FINRA) was tightening their oversight of these investments. Apparently brokers have not been accurately disclosing the risks. Here are the risks:

  1. You can lose a significant portion of your principal.
  2. The General Managers take 11 to 13% right off the top on day one.
  3. Your income is a return of capital. (This is why they tout them as tax efficient.)
  4. Your broker can earn 8.5% in sales commission upfront upon your purchase.
  5. You have no liquidity after you buy it.
  6. You have to hold the investment for 10 to 12 years and sometimes longer.
  7. Your investment can be rolled into another poor performing portfolio.
  8. Your dividend can be lowered, temporarily stopped or discontinued altogether.
The odds are that if you ever bought a Non-Publicly Traded REIT, then you had no idea of these eight items above. Why? Because, brokers do not have any duty to do things in your best interest. They do not have to tell you much of anything, except "sign here".

I see this often where I write about it and later on, I read an article basically repeating some of the issues that I have already raised. To me, this is insightful intuition based on my dedication to learning. It certainly is not luck, because it happens way too often.

Common Sense

In my last blog article I wrote about how insurance companies were having troubles with their annuity products. Lo and behold, in today's Wall Street Journal, there is an article on insurance companies having trouble with these annuity products. Specifically, these insurance companies are having to withdraw their guarantees. In addition, they are now refusing to accept new deposits into these once lucrative contracts. As my dad would say, "That was the old deal. This is the new deal."

To me, this is all just plain old common sense. How in the world can an insurance company guarantee to pay you 7% per year on an annuity, year after year for life? Guaranteed? As they say on ESPN, "Come on man!" Common sense would tell you that they cannot guarantee that, yet people bought these in droves from insurance agents. Now they are finding out that was the old deal. This is the new deal.

The Truth

Ask yourself this question whenever you invest your hard earned money. "Is it true? Is it true that this Non-Publicly Traded REIT is a good investment compared to a Vanguard REIT ETF that has none of the negatives described above?" The truth will answer the question for you. Always ask yourself, is it true? If you do not know, then do your due diligence or research on it. If you do, then you will make better decisions.

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