The Savings Game: Again: Investigate before you invest.

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By Humberto Cruz
Tribune Media Financial Columnist

June 19, 2007 — Say somebody at your church or place of work tells you about these "can't lose" investment opportunities:

One is a new fuel-cell technology to allow cars to run on tap water. Another is an options-trading system guaranteed to at least double your money. The third is a company with a new laser that kills lung-cancer cells in smokers.

Your best bet? Steer clear and report the matter to securities regulators. Cockamamie schemes like these are typical of investment scams often promoted by people you may trust, such as co-workers or fellow church members who may have been duped themselves.

"Remember: Investigate before you invest, no matter who is selling," advises Joseph Berg, president of the North American Securities Administrators Association, an organization of state regulators. "An investment that sounds too good to be true usually is."

Yet, 43 percent of American investors in a recent survey said they would likely put their money in at least one of these three "opportunities."

"The fact that this number is so high among investors who ought to know better is quite revealing," concludes The Money Track/IPT Investing Secrets Survey, a study conducted by Opinion Research Corporation for the "MoneyTrack" public television series (check your PBS station for listings) and the not-for-profit Investor Protection Trust (Web site www.investorprotection.org).

Among 1,255 Americans 18 and over who said they decide on household investments, a measly 1 percent appear to understand or put to use eight investment basics covered in the survey. They are:

• How compound interest works, with your interest earning more interest. For example, 58 percent of investors preferred to receive $1 million rather than a penny that doubles in value every day for 30 days. But that penny would grow to nearly $5.4 million!
• The meaning of diversification. Only 39 percent understood it involves balancing risk and return.
• Having a comprehensive plan to determine how much they need to save for retirement, something only 52 percent said they have (I doubt so many actually do).
• Avoiding over-reliance on Social Security (37 percent are relying heavily on it, suggesting they have not or will not have saved enough).
• Understanding that a sudden windfall, such as an inheritance, insurance settlement or winning the lottery, is not the most likely way for a young person to build a large nest egg. Just 58 percent realize that the surest way a 25-year-old can accumulate at least $500,000 for retirement is to invest regularly in stocks. Assuming a compounded return of 8 percent a year - less than the historical average for stocks - I calculated that a 25-year-old investing $125 a month would have amassed $515,000 by age 67.
• Understanding that stocks have delivered greater returns over the past 20 years than savings accounts or certificates of deposit. Only 56 percent knew that.
• Checking out financial advisers. Two-thirds of investors who use a broker, investment adviser or financial planner have not checked their credentials or disciplinary record with their state securities regulators (see Web site www.nasaa.org), the Securities and Exchange Commission (www.sec.gov) or NASD (formerly National Association of Securities Dealers (www.nasd.org). (For financial planners, I would add www.cfpboard.org.)
• Knowing how to avoid scams. The "new fuel-cell technology" and "options trading system" are actual swindles featured on the current season of MoneyTrack. "We deliberately kept the questions on a simple level to get a full and fair sense of what U.S. investors know and do," said Pam Krueger, co-host and executive producer of the PBS series (see www.moneytrack.org). "We definitely have our work cut out for us," she said.

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