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If nothing else during this holiday season, the financial world should hope for at least one gift: Better-informed investors.
They say the best defense is a good offense, and considering the constant drumbeat of corporate scandals and betrayal of trust, maybe it's time for investors to attack. And the first step or strategy should be becoming well-informed about the risks and rewards of investing.
Many of the corporate and investing shenanigans of the past two years could have been avoided had investors simply known better than to blindly trust executives and fund managers. Yet plenty of investors are woefully inadequate when it comes to financial literacy.
Pundits have long complained about the poor quality of our investment IQ. Even Federal Reserve Chairman Alan Greenspan said in a speech this fall that improved financial education is critical in the fight against fraud. A recent survey conducted by the National Association of Securities Dealers found that nearly 50 percent of investors polled wrongly thought that stock market losses were insured. Nearly 70 percent of those polled didn't know the risks and dangers of buying stocks on margin; that is, borrowing money to invest, and placing those stocks up as collateral for the loan. Such a dearth of fundamental investment knowledge makes those individuals ripe for the picking by unscrupulous and fraudulent funds.
According to the NASD, 97 percent of investors realize they need to be better informed about investing, and nearly half said that they could have avoided a negative experience if they had known more about investing.
To its credit, the NASD has taken steps over the past two years to make more information available to investors, such as developing and publishing Investor Alerts, brochures and online resource guides on such in-the-news topics as mutual fund class shares, 401(k) and 529 college savings plans, but investors remain at a distinct disadvantage. The NASD established a $10 million Education Fund to provide investors with high quality, easily accessible information and tools that can help them maneuver the bumpy road of investing.
And recent legislation passed to protect consumers against identity theft included a provision establishing a Financial Literacy and Education Commission that includes a toll-free number and an educationalWeb site, along with $3 million media campaign, there should be no excuse for investors to claim they didn't know the risks. There also are many other Internet pages with information for individual investors -- this Web site's Resources section has a guide to many of them.
Someone can only take advantage of you if you let them. It's time for investors to start looking out for themselves and not abdicate that duty to funds and money managers that frequently have their own interests at heart, interests that often conflict with those of the individual investor. In this Information Age, anyone with money to invest can easily educate themselves - they just have to make the effort.
The one good thing that has come to light in the wake of the mutual fund scandal is that investors now know where they have been failed and by whom. Now it's up to the individual investor to take charge. Fool me once, shame on you; fool me twice, shame on me.
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