Monday, January 16, 2012

Invest Smarter Than an MLB Star

By Larry Swedroe


COMMENTARY The lawsuit by former baseball All-Star Denny Neagle against his financial advisor should serve as a warning to all investors: Working with an advisor you can trust is important but shouldn't replace your own education on financial matters.

Denny Neagle, who pitched for six teams during his 13-year career and was a two-time All-Star, and his ex-wife filed suit against their former advisor, alleging that they were supposed to be in liquid investments such as stocks and bonds, but ended up in illiquid, expensive investments such as hedge funds and private equity funds. The lawsuit also claims they now can't access large portions of their portfolio and experienced large losses on alternative investments.

What put them in this position? They claimed they were "utterly unsophisticated" when it came to finances and were looking for help.

Certainly, Neagle, who signed a $51 million contract in 2000, isn't the first athlete to run into financial troubles. For example, NFL quarterback Mark Brunell, who earned an estimated $50 million during his pro career, filed for bankruptcy in 2010; news reports blamed failed business ventures. Three-time WNBA MVP Sheryl Swoopes, who also earned an estimated $50 million throughout her playing career and endorsements, filed for bankruptcy in 2004. She told the New York Times, "Growing up not having a lot of money, I was suddenly in a position to change my lifestyle and help those around me. But I didn't surround myself with the right people. I got in a position where it was like, 'Oh, wow, what happened?' "

It's easy to write off situations like these as athletes being irresponsible. It's also easy to place the blame at their feet, saying they should know better and stop being so trusting. But you don't have to be an athlete making millions to fall into the same traps. According to the National Foundation for Credit Counseling's 2011 Financial Literacy Survey, more than 40 percent of respondents gave themselves a C grade or lower for their knowledge of personal finance. And about three out of every four agreed that they could benefits from advice and answers from a professional.

Such issues can affect all walks of life. Think of the people taken in by Bernie Madoff and Allen Stanford. Or think of Olga Kuschnieryk, an 85-year-old who worked in a forced-labor camp during World War II before coming to America. She worked at a meatpacking plant and had sent more than $330,000 to a financial advisor before discovering he was running a Ponzi scheme.

Working with an advisor or financial professional can be hugely beneficial, but that doesn't absolve you of your responsibility to know your own financial picture. What investments do you hold? How big is your portfolio? What fees are you paying? How much risk are you taking? There's a large difference between not letting someone else handle the day-to-day management of your portfolio and being completely unaware of what you have.

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