BUZ LIVINGSTON: Football and finances

Published: Thursday, October 4, 2012 at 05:43 PM.

Donnan earned greater infamy when the Securities and Exchange Commission (the other SEC) charged him and a partner with an $80 million Ponzi scheme. The indictment alleges Donnan and his partner promised investors returns ranging from 50 to 380 percent by buying leftover merchandise from major retailers and reselling the products to discount retailers.

Outlandish returns, as Donnan allegedly promised, should raise eyebrows. With record low interest rates, three to five percent dividend yields on stocks look promising. Short-term certificates of deposit and AA rated municipal bonds along with money market funds provide microscopic returns but your principal is secure, contrasted with stocks. I love stocks, but do not invest funds needed within three years in stocks regardless of the dividend yield.  More risk-averse investors may want a longer horizon.

Individual stocks also carry company specific risk.  Wachovia, AIG, General Motors, Eastman Kodak, to name a few, were companies people owned for dividends. Since March 2009, the S&P 500 has returned almost 25 percent-annualized. Even though the broad market has recovered nicely, stockholders in these companies missed the rally. 

Owning individual stocks versus mutual funds or exchange-traded funds limits diversification-the only free lunch available to investors. It is nigh impossible to build a diversified portfolio of small company U.S. stocks or international stocks — both essential asset classes — without using mutual funds or exchange-traded funds.

Individual stocks can outperform an index but only because of increased risk investors bear. Individual stock selection acumen can be a compensation gimmick where investors not the advisor carry the risk. 

Buz Livingston, CFP offers hourly financial planning and fee-only investment management to clients along Florida’s Emerald Coast.  He can be reached at 267-1068, Buz@LivingstonFinancial.netor www.LivingstonFinancial.net.


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