BULLS & BEARS: I’m all for optimism, but be skeptical, too

When viewing the historical record of the stock market, it is clear investors who maintained a positive longterm stance have been rewarded with attractive compounded returns, despite some significant zigs and zags in between.

Americans are, on balance, an optimistic bunch, especially when it comes to our outlook for the future. A “best is yet to come” policy has served us well, providing the drive to innovate and improve our country’s standard of living.

Nevertheless, when it comes to making the specific investment decisions to reap those favorable long-term results, a healthy dose of skepticism can serve you well.

This quality may appear to be in contradiction to an optimistic long-term view. But when making decisions in the present, an investor who examines the rationality of an investment, and casts a wary eye at questionable offers, might be able to avoid poor investment choices that can lead to severe losses of capital.

This is the message coming from Indiana Investment Watch, an awareness campaign launched by Indiana Secretary of State Todd Rokita. The campaign material is available at the Web site www.in.gov/sos/. Funding for the program came from money the state received in the multibillion-dollar national legal settlements obtained from several brokerage houses for their transgressions during the market bubble.

The site lists the 13 common ways investors are likely to be trapped in 2006. Included are investment offerings such as self-directed pension plans, oil and gas schemes, viatical settlements and highyield promissory notes. Churning, or excessive trading of securities to generate commissions, is also on the list.

A category called Unsuitable Recommendations discusses some of the problems associated with one aggressively sold investment product, variable annuities. Products such as equity-indexed CDs and variable annuities can be described in attractive terms in sales pitches, but they are complex investments that may not be suitable for certain investors, like senior citizens.

Another section is called Investing Dos and Don’ts, which advises investors to educate themselves about the products they’re thinking of buying, and to do background checks on the individuals or institutions pitching them. The section also notes the need for investors to scrutinize the varying risks, costs and liquidity issues associated with any investment.

Most of the campaign materials alert investors to beware of fraudulent investment offerings. Wherever there is money involved, there will be a few people and organizations that carry out schemes to separate people from their money.

In the end, there are no shortcuts to building and protecting wealth through investing, and as Indiana Investment Watch warns, “If an offer sounds too good to be true, it probably is.” For an investor, adopting a skeptical attitude when evaluating investment opportunities, while at the same time maintaining a cautious long-term optimism, is not contradictory behavior.

The investment industry is salivating at the opportunity to advise the huge baby boomer population now entering retirement years. As these investors begin to take the time to review their nest eggs, they also need to take the steps to make sure they are informed about the myriad offerings likely to be pitched to them. Indiana Investment Watch is a good place to start that education process.

Skarbeck is managing partner of Indianapolis-based Aldebaran Capital LLC, a money-management firm. Views expressed are his own. He can be reached at 818-7827 or ken@aldebarancapital.com.

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