The article is critical of ETF's (Exchange Traded Funds) which I consider to be wonderful vehicles for personal investing in that they provide liquidity and diversification. However, misuse of them, although not as dangerous as ‘futures' can result in severe losses.
The idea that one can invest money in anything other than a bank or money market and simply leave it there untended and expect it to grow and grow spells financial disaster (even bond funds are volatile). If an investor doesn't want to tend his financial garden daily, or at least weekly, he should hire a financial gardener who will do it for him.
The worst thing any investor can do is ‘buy and hold'. That used to be the way of investing when good companies shared their profits through dividends with shareholders. Most profitable companies don't do that anymore and most dividend returns, if any, are pathetic! Instead they plow their profits back into the company to make it larger and more valuable. Thus for an investor to realize profits, he has to sell his investment at the right time. To do that, he has to pay attention!
If one graphs the price history of a company, one will note that the stock prices may rise over a period of time to the point the company becomes over-valued from investor exuberance. Savvy traders realize this and quickly sell at a profit causing the stock price to plummet leaving the guy who is not paying attention with a loss. So the novice eventually sells at a loss, the price bottoms out, and another group of investors see opportunities in the undervalued company and buy in. The whole cycle starts over again - like ocean waves!
Investors ignore warnings in volatile markets
By Svea Herbst-Bayliss Sat Jun 17
BOSTON (Reuters) - When a 76-year-old pensioner recently told Jill Schlesinger he wanted to put 10 percent of his $100,000 portfolio into gold, the financial adviser knew the latest investment craze would likely end badly, and soon.
"With each passing quarter, people became more greedy and more complacent," said Schlesinger, chief investment officer at money-management firm StrategicPoint Investment Advisors in Providence, Rhode Island. "And people lose sight of what a diversified portfolio is and what risk is."
Suddenly, investors who had never traveled beyond the East Coast of the United States were plowing money into India and Brazil and metals mined in faraway places.
Many are now suffering double-digit losses, but they won't get much sympathy from regulators because they were warned and because losses aren't yet heavy enough, according to financial advisers.
"There have not been enough people who have been damaged to get the regulators to notice this one," said Richard Smith, president of Capital Advisory Group in Richmond, Virginia.
Less than six years after the worst bear market in many investors' memories, people were eagerly dabbling in some of the world's riskiest markets in a craze fueled by hopes of recouping money lost when the technology bubble burst.
Money-management firms' steady offering of new products also fed the frenzy.
Exchange traded funds like StreetTracks Gold Trust, iShares Comex Gold Trust and iShares Silver Trust let investors get into precious metals markets. Crude futures were available, and Deutsche Bank had a ETF to track its diversified commodities index. And more specialized ETFs were on the way.
But many of those bets ended badly. Investors who purchased the recently launched Barclays Global Investors unit's silver ETF lost roughly 26 percent if they got in at the beginning. If they bought later, they lost even more.
ETFs, which have been available for less than 20 years, are similar to mutual funds but are traded in exchanges and allow investors to participate directly in markets.
"With new products like ETFs it is easy to speculate, but investors have no one to blame but themselves for any losses on a run-up they thought looked like a sure thing," said Capital Advisory Group's Smith. "The fund firms are only producing the vehicles, they are not showing anyone how to use them."
But there were plenty of warning signs along the way, making potential lawsuits over the losses highly unlikely, according to financial advisers and analysts.
Barclays said clearly that its silver ETF wasn't for the faint-hearted, according to financial advisers. And mutual funds that offered other ways to get into recently successful markets also cautioned investors in other ways.
Vanguard told its clients that the energy market was overheated, and Oppenheimer Funds recently raised the investment minimum for its Developing Markets fund to $50,000 to keep out investors who can't afford a potentially heavy loss.
"This was clearly a message to investors that the emerging markets were overheated and that there was a lot of hot money in the asset class," said Dan Lefkovitz, analyst at research firm Morningstar Inc. in Chicago.
Still, despite the warnings, investors made a critical mistake with commodities in the last months.
"Wall Street decided that commodities could be bought and held forever," and that prompted investors to plow in some $200 billion over the last three to six months, said Leonard Kaplan, president of commodities brokerage firm Prospector Asset Management in Evanston, Illinois.
"That was incredibly ignorant and it will happen over and over again because the public is infinitely stupid about these things," Kaplan said.
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