Inflation and Idiots

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LSUAlum's picture
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Someone concerned with a Death Benefit, someone looking to get a Gift Tax exemption by putting them into an account for someone else, estate planning, etc.... Please tell me ONE investment vehicle out there, just one, that has ZERO suitability for a particular investment.
Don't be arrogant, everything suits at least one person or is desirable for one person.

LSUAlum's picture
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While it is rare that B Shares make more sense than A or C shares, an argument can be made for them.
 
If a client does not qualify for break point cost reduction, AND has a time horizon of 6-9 years an argument can be made for the b share.
 
The crux of the argumet is how certain they are about their time horizon (shorter or longer makes a signficant difference) and would having their full initial investment working for them materially matter?
 
It is certainly rare, but not impossible that B shares make more sense in those instances.
 
P.S. the tounge in cheek part of the comment was not lost on me

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LSUAlum wrote:
Someone concerned with a Death Benefit, someone looking to get a Gift Tax exemption by putting them into an account for someone else, estate planning, etc.... Please tell me ONE investment vehicle out there, just one, that has ZERO suitability for a particular investment.
Don't be arrogant, everything suits at least one person or is desirable for one person.

 
Sorry, LSUAlum, I'm not trying to be arrogant here.  I'm still trying to find the real world situation in which a VUL would be the best choice for someone.   If you can give me the specifics of a situation where VUL would be the best choice, I'd really like to know what it would be.  I have not been able to figure out what this situation would be.   The situation probably does exist, but I don't know what it is.  Everything that you said pertains to life insurance in general, but not to VUL specifically.
 
 

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anonymous wrote:LSUAlum wrote:
Someone concerned with a Death Benefit, someone looking to get a Gift Tax exemption by putting them into an account for someone else, estate planning, etc.... Please tell me ONE investment vehicle out there, just one, that has ZERO suitability for a particular investment.
Don't be arrogant, everything suits at least one person or is desirable for one person.

 
Sorry, LSUAlum, I'm not trying to be arrogant here.  I'm still trying to find the real world situation in which a VUL would be the best choice for someone.   If you can give me the specifics of a situation where VUL would be the best choice, I'd really like to know what it would be.  I have not been able to figure out what this situation would be.   The situation probably does exist, but I don't know what it is.  Everything that you said pertains to life insurance in general, but not to VUL specifically.
 
 

If you feel that the equities markets will perform well (i.e. above the guaranteed rate of return for other permanent life products) and/or you want the flexibility of premiums as a consumer VUL may be a suitable option. The downside of decreasing death benefit you may feel is offset by your feeling that participating in the market gives you upside.
 
It's all about options. If the client wants payment flexibility and wants the risk (and associated return) of being in the market versus a guaranteed return (in addition to the potential tax benefits associated with Life Insurance as an asset class).

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LSUAlum wrote:
Someone concerned with a Death Benefit, someone looking to get a Gift Tax exemption by putting them into an account for someone else, estate planning, etc.... Please tell me ONE investment vehicle out there, just one, that has ZERO suitability for a particular investment.
Don't be arrogant, everything suits at least one person or is desirable for one person.
 
A zero coupon bond with a 30 year expiration, no call date & no secondary market to a guy that's 102 years old and has NO errs.
 
A Bernie Maddoff product?
 
Shares in MO to a guy that's at hospice for smoking related cancer?

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An index annuity funded with money set aside for child's college education.  10 year term.  Parent 41 at time of purchase, child 12.  12% surrender fee until the bitter end.  I have actually seen this.

LSUAlum's picture
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Hence the reason that I said that every investment has at least one person that it makes sense for. Since the two previous posters showed examples of investments that were poor choices for their respective investors, it illustrates that point.
 
No investment is perfect for everyone, and every investment has at least one person it is right for.
 
As for the Madoff investments, well, to be fair, people did make over 3x the S&P with their money for some time. Now, did they allow redemptions at any point ? I would assume they did (or else the scheme would have been found out before this year). So, if you got in, made 3x the S&P and got out in 5 years....that would have been a great choice (almost too good to be true...irony not by accident).

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LSUAlum wrote:
 
As for the Madoff investments, well, to be fair, people did make over 3x the S&P with their money for some time. Now, did they allow redemptions at any point ? I would assume they did (or else the scheme would have been found out before this year). So, if you got in, made 3x the S&P and got out in 5 years....that would have been a great choice (almost too good to be true...irony not by accident).
 
Until the money is clawed back by the trustee settling the crime.

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Wet_Blanket wrote:LSUAlum wrote:
 
As for the Madoff investments, well, to be fair, people did make over 3x the S&P with their money for some time. Now, did they allow redemptions at any point ? I would assume they did (or else the scheme would have been found out before this year). So, if you got in, made 3x the S&P and got out in 5 years....that would have been a great choice (almost too good to be true...irony not by accident).
 
Until the money is clawed back by the trustee settling the crime.

I would be willing to bet that there is no way they can or will clawback monies redeemed by 'shareholders' of the madoff funds.
 
The negative press regarding the destruction of wealth of 'innocent' investors won't be helped by the notion of clawbacks on the money that some of the 'innocent' investors already cashed out.
 
Madoff goes down for this but no way the investors who cashed out do, unless of course they were privy to the ponzi scheme details. In that case, they weren't investors they were collaboraters and it's a different story.
 
 

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LSUAlum wrote:Wet_Blanket wrote:LSUAlum wrote:
 
As for the Madoff investments, well, to be fair, people did make over 3x the S&P with their money for some time. Now, did they allow redemptions at any point ? I would assume they did (or else the scheme would have been found out before this year). So, if you got in, made 3x the S&P and got out in 5 years....that would have been a great choice (almost too good to be true...irony not by accident).
 
Until the money is clawed back by the trustee settling the crime.

I would be willing to bet that there is no way they can or will clawback monies redeemed by 'shareholders' of the madoff funds.
 
The negative press regarding the destruction of wealth of 'innocent' investors won't be helped by the notion of clawbacks on the money that some of the 'innocent' investors already cashed out.
 
Madoff goes down for this but no way the investors who cashed out do, unless of course they were privy to the ponzi scheme details. In that case, they weren't investors they were collaboraters and it's a different story.
 
 
 
They can't let it go. The legal precedences it would set will simply not allow it. It will take a generation to truly unwind this case and at the end of the day anybody who used the funds will get screwed as they never had constructive ownership of the funds.

Wet_Blanket's picture
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It is my understanding that there has been claw back already (or an attempt), because realized gains taken by those investor weren't real - they should get their principle back though (I believe).
So the best outcome is that they had money tied up for 30 years and didn't earn a dime.

Wet_Blanket's picture
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On a realated note, anyone ever read the Victims' Statements submitted to the judge for Bernie's sentencing?  Heart breaking (some cases).

LSUAlum's picture
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Wet_Blanket wrote:On a realated note, anyone ever read the Victims' Statements submitted to the judge for Bernie's sentencing?  Heart breaking (some cases).

Paint me as a cynic, but for the most part I don't feel bad for the investors. They were sold a bill of goods that wasn't true and that's unfortunate, but they were enticed by it because of their own greed. When you're being told that you can return 20% a year you should KNOW that something is rotten in the state of Denmark.
 
If it sounds too good to be true, it is.
 
It's the same level of greed that contributed to the housing bubble, the Dot.com bubble, and almost every other bubble. If you want out of the ordinary returns, you have to know that there is a distinct possibility that you will lose alot (most/all in many cases) of your money.
 
It is nothing but shear greed that causes someone who has  5 million dollars to feel they have to 'beat the market' and get 3x the return of the S&P.
 
Am I a greedy person? Of course. Would I take high risks for high possible returns? Absolutely. They key is I wouldn't feel bamboozelled (sp?) if I lost it all, and I would expect zero sympathy if it happened.

LSUAlum's picture
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Gaddock wrote:LSUAlum wrote:Wet_Blanket wrote:LSUAlum wrote:
 
As for the Madoff investments, well, to be fair, people did make over 3x the S&P with their money for some time. Now, did they allow redemptions at any point ? I would assume they did (or else the scheme would have been found out before this year). So, if you got in, made 3x the S&P and got out in 5 years....that would have been a great choice (almost too good to be true...irony not by accident).
 
Until the money is clawed back by the trustee settling the crime.

I would be willing to bet that there is no way they can or will clawback monies redeemed by 'shareholders' of the madoff funds.
 
The negative press regarding the destruction of wealth of 'innocent' investors won't be helped by the notion of clawbacks on the money that some of the 'innocent' investors already cashed out.
 
Madoff goes down for this but no way the investors who cashed out do, unless of course they were privy to the ponzi scheme details. In that case, they weren't investors they were collaboraters and it's a different story.
 
 
 
They can't let it go. The legal precedences it would set will simply not allow it. It will take a generation to truly unwind this case and at the end of the day anybody who used the funds will get screwed as they never had constructive ownership of the funds.

What legal precendet exactly are you setting? That an 'innocent' investor is involved in a scam unknowingly and benefits from it by cashing out?
 
Should share holders of Enron who happend to sell at the height of the Energy Boom have to pay back the money they 'earned'?
 
I would beg to differ that as an unknowing participant they can clawback the money. Lets say, you already lost the money you had cashed out. Would they force you into asset liquidation to pay for the clawbacks, even though you had no knowledge of the scam? I cannot see how they would do that. In fact, I would venture a guess that they would be sued if they tried. I don't see it ever happening.

Wet_Blanket's picture
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LSUAlum wrote:Paint me as a cynic, but for the most part I don't feel bad for the investors. They were sold a bill of goods that wasn't true and that's unfortunate, but they were enticed by it because of their own greed. When you're being told that you can return 20% a year you should KNOW that something is rotten in the state of Denmark.
 
If it sounds too good to be true, it is.
 
Not saying that they weren't entirely at fault, a lot of them had all of their money with Madoff.  But I do feel sorry for some of them.  They were uneducated investors who put their faith in the system - which failed them (SEC).
 
We've all met people that it is nearly impossible to explain what A, B, and C shares are - let alone stock and bonds - and to expect them to be able to conduct effective due diligence on a "RIA" is ridiculous. 
 
Read some of the victims' statements.  It is worth a read.
Some of the other investors got what they deserved though.

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Wet_Blanket wrote:LSUAlum wrote:Paint me as a cynic, but for the most part I don't feel bad for the investors. They were sold a bill of goods that wasn't true and that's unfortunate, but they were enticed by it because of their own greed. When you're being told that you can return 20% a year you should KNOW that something is rotten in the state of Denmark.
 
If it sounds too good to be true, it is.
 
Not saying that they weren't entirely at fault, a lot of them had all of their money with Madoff.  But I do feel sorry for some of them.  They were uneducated investors who put their faith in the system - which failed them (SEC).
 
We've all met people that it is nearly impossible to explain what A, B, and C shares are - let alone stock and bonds - and to expect them to be able to conduct effective due diligence on a "RIA" is ridiculous. 
 
Read some of the victims' statements.  It is worth a read.
Some of the other investors got what they deserved though.
 
Some of those were pretty awful (I posted the link below for those that are too lazy to Google it).
 
And I think you're right about the due diligence thing. Being registered is supposed to mean something.
 
So far as investors deserving it because they were too greedy, the world of investing is primarily a world of greed, otherwise you would just be buying T-bills for yourself and clients. We are all looking for decent returns, and the fact that an investor thought they had a trustworthy way of doing it does not mean they deserve to get done like that.
 
That's like seeing a girl in a miniskirt and saying she deserves to get raped. That's insane.
 
http://www.huffingtonpost.com/2009/06/15/madoff-victims-statements_n_215912.html 

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"What legal precendet exactly are you setting? That an 'innocent' investor is involved in a scam unknowingly and benefits from it by cashing out?"
 
 
If they 'cashed out' with money that was illegally obtained it was not their money to use. That's where unwinding this thing will take years. If Bernie paid you with money he got from me illegally it is still my money not yours. Same principal applies to people families that have been awarded artwork that was stolen from their family in WW2 and then sold to a museum for huge money. Legally the person selling it never actually had ownership so the fact that the museum paid for it isn't relevant to who actually owns it. Same reason a pawn shop doesn't want to pay for a stolen item.
 
The interesting part is going to be how far they take the recovery of the funds. Will they go all the way back to the bakery that made the bead? Think of the logistical nightmare trying to follow the money. What's even more scary is how many dollars will be used to recover one? I'll bet the answer to that when it's all said and done will be staggering. Imagine an army of lawyers with an open check book via Uncle Sam.
 
 

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The idea that people deserved to loose their life saving because they should have known Madoff was a crook when not even the smartest people in the world for the most part didn't get it is just plain RETARDED!!!
 
If they were only making 5% would they be less deserving of being financially destroyed for a lifetime of work and saving? The very thought IMHO makes your credibility in question.
 
At what point do you feel it becomes OK for a person to be financially destroyed? Can you actually delineate this? Is there a hierarchy or just a broad brush stroke?
 
 

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Gaddock wrote:The idea that people deserved to loose their life saving because they should have known Madoff was a crook when not even the smartest people in the world for the most part didn't get it is just plain RETARDED!!!
 
If they were only making 5% would they be less deserving of being financially destroyed for a lifetime of work and saving? The very thought IMHO makes your credibility in question.
 
At what point do you feel it becomes OK for a person to be financially destroyed? Can you actually delineate this? Is there a hierarchy or just a broad brush stroke?
 
 

While no one deserves to be taken advantage of, there is more than a modicum of responsibility to do one's own due dilligence when investing. People that are unwilling/unable to do that before investing have that right. They are also not the people that should be investing in a product or service they do not understand.
 
The reason the SEC put in the 'sophisticated' investor rules is so that the unsophisticated investors will not embark on investing their money when they don't understand the product or vehicle they are investing in.
 
Alot of this argument boils down to where you stand on the responsibility of the consumer when entering into a contract or agreement to use a product or service.
 
I already feel that there is too much regulation in government and that there is a lack of personal responsibility or accountability for one's own actions. To rule of thumb used to be that if a 'resonable' person would or should have known that the results are 'too good to be true' then the courts would assume the investor knew.
 
So that begs the question, should a resonable person have known that the madoff scam was 'too good to be true' and thus given less sympathy for their loss? My answer is yes. A reasonable person should assume that quoated returns that are 3x the S&P and GUARANTEED are too good to be true. They are either not acting reasonably, or they are not sophisticated enough to know what reasonable is, either way, they have a responsibility to know this before they enter into an agreement.
 
Feeling bad for someone is NOT the same as feeling like they should be entitled to recourse.
 
Your bakery comment is intriguing. I agree wholeheartedly that you can't really draw a line where to 'follow the money'. So if a client cashed out and say spent that money on a different house. The person selling the house was paid in ill-gotten funds, are they responsible too?
 
 

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Gaddock wrote:The idea that people deserved to loose their life saving because they should have known Madoff was a crook when not even the smartest people in the world for the most part didn't get it is just plain RETARDED!!!
 
If they were only making 5% would they be less deserving of being financially destroyed for a lifetime of work and saving? The very thought IMHO makes your credibility in question.
 
At what point do you feel it becomes OK for a person to be financially destroyed? Can you actually delineate this? Is there a hierarchy or just a broad brush stroke?
 
 

I realize my above post does not answer the questions you posed so I'll answer them in this one.
 
Most of the 'smartest' people in the world did know that Madoff was scamming, they just didn't know exactly how. They knew that it was too good to be true. The same way that you know intuitively if someone tries to sell you something that works too well, or doesn't cost enough for what they say it will do. Your intuition tells you that something's wrong so you don't buy it.
 
If they had been promised 5% and everything seemed in order and MADE SENSE based on historical returns, then yes they would be entitled to more recourse. Again, it's about what seems resonable. Promises of great wealth with little risk raises a giant red flag screaming 'IT IS TOO GOOD TO BE TRUE, PASS IT UP' to just about everyone.
As for the point at which it's ok for a person to be financially destroyed, can I deliniate this. Sure. When someone is trying to significantly outpace the overall returns of the market (defining market is a bit more murky. I would define it broadly as the returns of the S&P but that is simplistic also). If someone is trying to get around the fundamental concept of Risk V. Reward and fails to do so; it is perfectly ok for them to be destroyed financially. Conversely, it is perfectly acceptable for someone to take on an inordinate amount of risk and achieve the reward (I actually applaud that concept). Bottom line is with high yield potential you have to accept the risk of financial ruin or else you can't have a true fair market economy. Harry Markowitz has been publishing information on Efficient Frontiers for Risk V. Reward returns on Modern Portfolio Theory since 1959 (earlier some in 1952 but comprehensively since 59). Now, it's not widely known by lay persons that he's done this, but what IS widely known is the concept of Risk V. Reward. Just as if you may not understand the math behind how to compute Gravity as Isaac Newton did, you can understand the concept of gravity because it is REASONABLE.
 
"People want capitalism on the way up, and socialism on the way down." I love the poignancy of that quote.

jhnsmith978's picture
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Yeah, Inflation has made a great impact on people. But I've read of all the traders here who mention trading has changed their life, they are independent, free and have found their way. Before that though they lived a certain lifestyle and now they live a new one. How do you people deal with the change?Forex

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