Broker Check
Read the fine print; follow your gut.

Read the fine print; follow your gut.

| May 20, 2024

I was reading the latest case from the Securities and Exchange Commission, a $76 million judgement against Red Rock Secured. It seems Red Rock Secured's owners convinced folks to liquidate investments in their retirement accounts and invest in gold and silver coins at a mark-up of only 1% - 5%. According to the judgement, the mark-up was as high as 130%. At least 700 investors were defrauded out of $50 million. A few thoughts spring to mind.

The first is that I encourage all of my employees to read the prospectus on any investment they are considering. Yes, some prospectuses are 200 pages long and some are about as attention grabbing as Swann's Way by Marcel Proust. And some seem to be written in a font size that requires a microscope.

At the same time, these booklets lay out what the investment is supposed to do, what risks are involved, etc. In reading it, you might ask yourself, does this investment match what I am trying to achieve? Am I comfortable with the described risks? Trust me, reading the prospectus is worth your time. And if an investment is presented as not having a prospectus, I think you have your answer.

A second thought is a long-held adage of mine. I evaluate all of my 401k investments using a defendable and repeatable process, in keeping Department of Labor mandates. To that end, I naturally screen-out investments that are high risk (measured in part by standard deviation) or that do not have a long track record. I try to act in the manner of a prudent person (another Department of Labor precept).

Yes, I have had employees squawk at me for not letting them invest in X, Y, or Z that just came out. My view is that if they would like to invest in the new shiny object of the day, they can certainly do so on their own. I really see 401k investments as ones designed to get you to and into retirement. Some of these new fangled ideas make me quite nervous and I avoid them.

A third thought is to follow your gut. T Rowe Price, in the book written about his philosophies, remarked, "Don't begrudge me a fair profit. Begrudge me the unfair profit". To that end, how exactly is the company or person offering an investment making money? What does your gut tell you? If the business case in front of you is not passing your scratch and sniff test, you might think about it.

Do your research and read the fine print. Be patient. Align and diversify your investments according to your retirement time horizon and financial risk appetite. And above all, listen to your gut. I can't say this would have saved the investors at Red Rock Secured but it does make one wonder.