According to a study from Comparitech, in 2021, more than 90,000 Americans fell victim to investment fraud, totaling a collective loss of almost $1.6 billion.1 As we have discussed before, anyone can fall for an investment scheme, as the people who perpetrate financial scams and Ponzi schemes can be highly sophisticated. At Matson Money, we prioritize educating investors on ways they can protect themselves from falling prey to an investment-related con. The first step? Becoming a conscious investor.
Taking the time to think about who you are, your ideals, and your investment philosophy is key to not only becoming a focused investor but can help you become more alert and aware of potentially harmful investing practices and potentially dishonest players in finance. Being part of a community can be impactful for information-sharing and can help us learn from one another about how best to reach financial goals in a prudent way. When left to our own devices, though, instincts, emotions, and perceptions can become twisted with fear and doubt. And when we are afraid, we are much more likely to be duped by a savvy scam artist.
To move past these basic human roadblocks, a conscious investor can investigate their inner psyche, talk these findings through with a coach, and discover a path toward investing peace of mind. Below are six questions investors can ask themselves to help develop confidence in their long-term investing strategy and financial future.
1. When building your investment portfolio, can you say that you know exactly what you are doing and why?
To answer this question, investors can consider two things: the investment itself and the larger reason for investing. The first question is simple. Most people are not experts in finance, so they can use the help of a coach when developing their investing philosophy. Secondly, investors should understand their True Purpose for MoneyTM. What do you hope to achieve? Is it starting a business, giving back to the community, leaving a legacy for your loved ones, or something else? Once you discover your True Purpose for Money, financial decisions can become much clearer.
2. Are you working with a financial coach who is a fiduciary?
When choosing an advisor, you can consider not only working with an advisor who has a fiduciary duty, but also someone who serves as a coach. In times of uncertainty, financial coaches can help guide and empower clients, helping them understand their investing philosophy and, most importantly, how to stay prudent and disciplined over a lifetime. Unlike commissions-based advisors who are not obligated to put their investors first, Matson Money operates as a fee-based Registered Investment Advisor (RIA) that puts the needs of the investor at the forefront. As a fiduciary, we are a stand for our investors and place their best interests above all other considerations.
3. Do you understand how markets work? Can you clearly state where the return from markets comes from and identify expected market premiums?
To help understand how markets work, you can familiarize yourself with these three academic investment philosophies, two of which won Nobel Prizes, summarized here:
- The Three-Factor Model: a portfolio’s exposure to three simple yet diverse risk factors—market factor, size effect, and value effect—can determine how it performs.2
- Efficient Market Hypothesis: at any given point in time, the actual price of a security is a good estimate of its intrinsic value.3
- Modern Portfolio Theory: a tool for optimizing portfolio diversification through a mix of assets. Theoretically, it can deliver the maximum expected results for the level of risk the investor is comfortable taking4
4. Do you know how to measure your portfolio’s diversification?
Many investors are surprised to find that their portfolios aren’t as diversified as they could be. Ask your coach how many markets and countries you are invested in. At Matson Money, we have over 25,000 holdings across more than 80 countries.
5. Do you have a system to measure portfolio volatility?
Investors can stress test their portfolios by looking at asset mixes and comparing them against their performance over time. During the past ten-year bull market, many investors didn’t bother to do this as performance continued increasing. Without stress-testing regularly and maintaining a long-term perspective, you can easily end up building a portfolio that feels stable but can lose its value overnight.
6. Have you measured the total amount of commissions and costs in your portfolio based on the investments you own?
Though fee percentages may seem small, over a 20-year timeframe, they can add up to tens of thousands of dollars. To identify fees, look on your statement for the following: expense ratios, advisory fees, retirement-plan fees, and transaction fees—and then add them all together. If you work with a coach, you should consider working with one who prioritize low-cost funds.
If this is your first time going through these questions, don’t feel discouraged if you have more negative responses than positive responses. Even seasoned experts have work to do. The often-questionable culture on Wall Street can be focused on ensuring investors are thinking about the next shiny object, not about academic investing principles and the behavioral elements of investing. Keep working at it, find a financial coach who can help you discover the answers, and soon you can be in a much better place to embark on your investing journey. You can also be more equipped to spot financial scams before you potentially fall victim to them. When Mark Matson founded Matson Money in 1991, he did so under the conviction that there must be a better way to serve the needs of investors.
Remember: knowledge is power. The more you know, the better you can help protect yourself, your family, and your finances.
1. Bischoff, Paul. 90,000 Americans lost $1.58 billion to investment scams in 2021. Comparitech. April 27, 2022. Retrieved 9 August 2022 from 90,000 Americans lost $1.58 billion to investment scams in 2021 – Comparitech
2 Three Factor Model
Fama, Eugene F. and Kenneth R. French. “The Cross-Section of Expected Stock Returns,” Journal of Finance, 47, June 1992.
3. Efficient Market Hypothesis
Eugene F. Fama, “Random Walks in Stock Market Prices,” Financial Analysts Journal, September/October 1965.
4. Modern Portfolio Theory
Markowitz, Harry. Portfolio Selection: Efficient Diversification of Investments. New York. Wiley. 1959. Print.
Harry Max Markowitz is an American economist, and a recipient of the 1989 John von Neumann Theory Prize and the 1990 Nobel Memorial Prize in Economic Sciences. Markowitz is a professor of finance at the Rady School of Management at the University of California, San Diego.
Eugene F. Fama, 2013 Nobel laureate in Economic Sciences; is widely recognized as the “father of modern finance.” His research is well known in both the academic and investment communities. He is strongly identified with research on markets, particularly the Efficient Market Hypothesis.
This content is not to be considered investment advice and is not to be relied upon as the basis for entering into any transaction or advisory relationship or making any investment decision.
This content includes the opinions, beliefs, or viewpoints of Matson Money and its Co-Advisors. All of Matson Money’s advisory services are marketed almost exclusively by either Solicitors or Co-Advisors. Both Co-Advisors and Solicitors are independent contractors, not employees or agents of Matson.
Other financial organizations may analyze investments and take a different approach to investing than that of Matson Money. All investing involves risks and costs. No investment strategy (including asset allocation and diversification strategies) can ensure peace of mind, guarantee profit, or protect against loss.
Due to Matson’s investment philosophy and methodology, any references by Matson or by unaffiliated third parties to specific holdings, number of holdings, or specific countries or asset classes are references to the underlying funds in which the Matson-advised mutual funds invest. Mutual funds currently use SEC Forms N-PORT and N-CSR to disclose their quarterly holdings at the end of each fiscal quarter (Form N-PORT replaced Form N-Q),therefore any specific holdings cited are accurate as of that date or is data provided directly by the underlying fund company itself, and do not in any way represent portfolio management research or trading decisions made by Matson Money, other than to the extent Matson Money has allocated Matson-advised mutual fund investments to such underlying funds. Form N-PORT can be found online at https://www.sec.gov/Archives/edgar/.