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Should you have a Money Manager?

Declining stock prices
S&P500 for the past 6 months

The economy is taking a dive. Every day you hear negative news. There is a banking crisis fueled by defaults in the repayment of subprime loans. The downturn in the housing market has caused house values to plummet and people who hoped to make a profit from increased real estate values have been disappointed. Increased unemployment has many people scrambling to get any job just to meet living expenses. It is harder to get a loan because of the banking crisis, and as if that were not enough, stock prices are down.

Have you looked at your retirement savings recently? A typical portfolio that invests in the Dow Jones or the Standard and Poor's 500 (S&P 500) Index has decreased in value by 11% in the last six months. Some individual stocks have lost 90% of their value! If you had equity investments of $100,000 in October of 2007, now you have less than $90,000 Dollars. It is at times like these that you start doubting your ability to invest your own money, and money managers come out of the woodwork offering to take charge of your portfolio and make you rich through their sophisticated market research. The problem with money managers is that they are not content to just take a percentage of your profit like the IRS. They want to take a chunk of your principal whether you make money or not.

A pushy stock broker called me recently. I had not heard of him or of his firm before. He was a really good and convincing salesman. I refused him because I was concerned that the call might be a scam, and because I thought that the fees were high. Also, other than his promises of high returns, there was no guarantee that I would make money. He had one hot stock tip. An executive of some energy company had bought a large number of shares in the open market. Since this executive was an insider, he obviously knew that there would be a large payoff. I should also jump in to take advantage of this rare opportunity. I hung up on the guy when he did not take "no" for an answer. His partner called me a few minutes later. He was equally pushy and I also hung up on him.

I had to ask a lot of questions to find out how much this company charged, but basically, these money managers wanted 1% of the principal when you deposited your money, and they wanted another 2% when you withdrew your money. In addition, they would charge over $100 per stock transaction. I figured that if I let them manage $100,000, they would take $3,000 off the top, and then they would take at least another $1,000 per year on 10 brokerage transactions needed to buy and sell stocks to implement their investment strategy. That is 4% in fees! Assuming average returns of 7% in the market, it would have been hard to keep ahead of inflation with bloodsuckers like these.
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