Protecting Yourself from Investment Fraud

Protecting Yourself from Investment Fraud

Recently, Federal prosecutors alleged another billion dollar investment fraud (Platinum Partners) occurred, in which investment professionals may have dramatically overvalued the assets that they held for their clients. Should all investors be worried? Is there any way to protect one’s assets from major risks such as massive fraud?
A starting point to protection from fraud is to make sure that the investments that you hold are publicly traded, such as being listed on the New York Stock Exchange and are subject to close regulation by the SEC (U.S. Securities and Exchange Commission). At Biltmore, our model portfolios focus on public mutual funds, with underlying portfolios dominated by publicly traded securities that are regularly bought and sold in competitive markets.
Second, make sure that the assets that your investment professional says that you hold are actually being held in a safe place for your benefit. Our clients’ assets are held at major firms such as Charles Schwab which holds $2.7 trillion in client assets. Further, most of our clients’ money has SIPC protection up to $500,000.
Third, make sure your portfolio is well-diversified. Biltmore’s model portfolios contain roughly twenty mutual funds each. These funds are diversified among types: open end, closed end and exchange traded. Each of these funds averages hundreds of underlying securities, meaning that the model portfolios contain thousands of underlying securities. Detecting a major fraud before it occurs, such as Enron in 2001, is not easy. But investors such as those holding Biltmore’s model portfolios know that their exposures are well-diversified.
No investment is perfectly safe. Nothing can protect us perfectly from a truly monumental natural or man-made disaster. Even the world’s safest investments such as U.S. Treasuries are very unlikely to protect investors from inflation on an after-tax basis. But wise investing means taking appropriate levels of well-diversified risks. News articles such as the alleged fraud at Platinum Partners should remind us of the importance of prudent investing.

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