You May Be Suffering From 'Abused Investor' Syndrome

For years, investors have been separated from their money by a greedy and often corrupt securities industry, culminating in the 2008 meltdown which almost precipitated a global depression.
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There is a striking similarity between the behavior of many investors and those suffering from "battered person syndrome". Those unfortunate souls involved in abusive relationships often believe the violence was their fault. They can't make the intellectual leap of placing the blame on the abuser where it belongs. They ascribe to the abuser an irrational belief that he (or she) is omnipresent and omniscient.

For years, investors have been separated from their money by a greedy and often corrupt securities industry, culminating in the 2008 meltdown which almost precipitated a global depression and caused a restructuring of the financial services industry.

If they can't manage their own money, why do you entrust them with yours?

Remarkably, nothing has changed. Here are some recent events:

  • Ratjat. K. Gupta, formerly the head of McKinsey & Company and a former member of the board of Goldman Sachs, was convicted of conspiracy and securities fraud. Mr. Gupta leaked boardroom secrets to Raj Rajaratnam, a billionaire hedge fund manager. In May, 2011, Mr. Rajarathnam was convicted of insider trading and subsequently sentenced to 11 years in prison.
  • According to an article in Rolling Stone by Matt Taibbi, three executives employed at GE Capital (owned by General Electric) were convicted of antitrust violations for colluding to rig bids on municipal bonds. According to Mr. Taibbi, this was a "breathtakingly broad scheme to skim billions of dollars from the coffers of cities and small towns across America. The defendants allegedly colluded with "virtually every major bank and finance company on Wall Street." Mr. Taibbi aptly called it: "The Scam Wall Street Learned from the Mafia."
  • Just the kind of people you want to entrust with your money.

    You should make it your habit to parse through the Litigation Releases issued by the SEC almost daily. The theme of most of these cases is remarkably consistent. Investor gives money to broker or advisor who promises high returns with little risk. Broker or advisor pockets the money or uses it for purposes unrelated to the investment. Investor loses all or most of her investment.

    Yet, hope springs eternal.

    I am overwhelmed with emails from readers who are in the "omnipresent and omniscient" phase of abused investor syndrome. One former client told me she had decided to obtain citizenship in a tiny island, sell all her assets, buy gold and move there. She was absolutely convinced an economic tsunami was fast approaching. Her "guru" sold both access to citizenship and gold. One stop shopping. It wasn't of much comfort when I told her I didn't understand how her new residence would escape the consequences of this disaster. I also noted that hoarding gold on a remote island might expose her to risks she had not contemplated.

    Most members of the securities industry are not criminals -- at least not the kind defined in the penal code. They are far more dangerous. They claim to have "expertise" in stock picking, market timing, manager picking or the ability to put you in investments with big returns and modest risk. Most investors believe them.

    Sound familiar? If so, you can learn a lot from the literature on battered woman syndrome. Studies show the longer the women stay in the relationship, the more likely they are to be seriously injured.

    The lesson for investors is clear. Your "market beating" broker or advisor can't hurt you if you end the relationship.

    Dan Solin is a senior vice president of Index Funds Advisors. He is the New York Times bestselling author of The Smartest Investment Book You'll Ever Read, The Smartest 401(k) Book You'll Ever Read, The Smartest Retirement Book You'll Ever Read, and The Smartest Portfolio You'll Ever Own. His new book is The Smartest Money Book You'll Ever Read. The views set forth in this blog are the opinions of the author alone and may not represent the views of any firm or entity with whom he is affiliated. The data, information, and content on this blog are for information, education, and non-commercial purposes only. Returns from index funds do not represent the performance of any investment advisory firm. The information on this blog does not involve the rendering of personalized investment advice and is limited to the dissemination of opinions on investing. No reader should construe these opinions as an offer of advisory services. Readers who require investment advice should retain the services of a competent investment professional. The information on this blog is not an offer to buy or sell, or a solicitation of any offer to buy or sell any securities or class of securities mentioned herein. Furthermore, the information on this blog should not be construed as an offer of advisory services. Please note that the author does not recommend specific securities nor is he responsible for comments made by persons posting on this blog.

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