By Dr. Scott Brown, Ph.D.

Soft dollars, a form of legal kickback, is a sly way you can get ripped off by mutual fund managers. Full service brokers give these kickbacks to non-indexed mutual funds in the form of a “rebate” to purchase research, software, and even computer equipment.

You pay for these soft dollars! In recent years, the SEC estimated that soft-dollar deals exceeded $1 billion. Typically, $1 accrues for every $1.60 of brokerage commissions paid. Congress made these kickbacks legal in 1975 when it passed the “safe harbor” law. The legislation allows fund managers to pay more in commissions than is necessary, as long as the excess comes back in the form of services or research that benefits investors.

The problem is that this has created an opaque system that can be abused. In 1998, the SEC found that some money mangers were using soft dollars to pay for salaries, office rent, and even vacations! Think about this. You sweat every day at work to make a living. You buy a mutual fund to secure your retirement. Then the person who is supposedly protecting your retirement is sipping Margaritas in Cancun discussing with his or her buddies where to buy their next mansion with your retirement dollars!

The second problem is that many funds are not taking advantage of cost saving efficiencies in their operations just so that they can keep the soft-dollar spigot open. Think about this as well. If you had enough money to not have to work you would spend a considerable amount of time looking for safe places with a good return for your money. You would not waste money on things your family did not want and hence did not need.
Why give your money then to a mutual fund managers who could care less if they waste some of your retirement dollars; its no skin off their back! The best way to avoid these losses altogether is to restrict your purchases of mutual funds to your 401(k) and try to only buy indexed mutual funds.

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By Dr. Scott Brown, Ph.D.

You have probably been hearing, seeing and reading that real estate investing is the best thing since sliced bread. There are many late night cable television infomercials spewing out sales pitches for courses that teach you how to buy residential real estate no money down or for next to nothing. Furthermore, polished pitch men on the advertisement emphasize that it is so easy that anybody can do it. They smugly show you that it is simple as they pencil out on the back of a napkin how you will supposedly make a fortune in real estate. Then these real estate investment course promoters show “actual” interviews of people who have reportedly made gobs of money with the course system.

Although it is true that fortunes can be made in real estate it is actually more likely that it will be the guru owner of the real estate course than you! The reason is that real estate investing is a lot harder than most people realize. When you buy, rent, and sell real estate as opposed to stocks you are dealing directly with people and there is not organized exchange to keep things standardized. Don’t forget that courts see it as their duty to protect the shelter of families even if they are non paying renters who are total deadbeats. Another problem is that many contractors who do odd fix up jobs for real estate rehabbers are drifters with as many personal and financial problems as bad tenants. They damage houses and are down the street as soon as they get a little cash out of the hapless real estate investor.

It also takes many years to learn how to properly assess value in a town or neighborhood and get the required experience in real estate closings to not have the big profits you initially think you see in a deal leak out. The key point of this edition of the “Wallet Doctor” is that real estate investing is a business. Like any other business it requires constant dedication and education. If you work full time it means losing your free time to your rentals and rehabs. If a property doesn’t sell or if the tenant doesn’t pay you will have to lose part of your salary to cover the mortgage. You should enjoy your regular full time job because you selected it. If you prefer cookouts and trips to the beach over collecting rent and repairing your residential real estate investment then the stock market is a better place for you.

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By Mika Hamilton

Investments are scary for some people, especially those who have never invested before. We grow up hearing horror stories about how this person or that person lost everything they had on some bad investment some odd years ago and it builds in us a fear of investing so profound that it is sometimes easier to get a confirmed agoraphobic to march in the Macy’s Day Parade than it is to get someone to put a few dollars into stocks or mutual funds.

Part of the problem is that people have the wrong idea about how investments should work. We’re always looking for the big score, the quick road to riches, and the quick return investments that will turn ten thousand dollars into ten million dollars overnight. Guess what? These investments don’t exist.

“What about Microsoft?” is the question many will ask here. “What about Ebay and Wal- Mart and Xerox and…” you get the picture. While it’s true there have been some companies that have surprised everyone by becoming quick successes and their stockholders watched with excited eyes and dilated pupils as their portfolios did some colossal growing in short periods of time, these are the exception rather than the rule in investing. Investments should be looked at as long-term money makers and security providers, not a spin of the roulette wheel with a big payoff or a devastating loss.

If you’re investing casually the best thing you could possibly do is find a stable company or mutual funds, put in your money, and forget about it. Those that watch the market reports constantly and suffer heart palpitations every time the company they have invested in drops a few points will either go crazy or wind up losing money by selling company stock at a lower price than they paid for fear that if they don’t get out now, the bottom will drop out, leaving them with worthless stock. Don’t worry. Coca-Cola is not going belly-up anytime soon.

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