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Investing in Fear and Greed Can Lead to Disastrous Results

by on May 11, 2014 6:00 AM

Scare tactics take many guises, from the innocuous to the really damaging.

Some salespeople have been trained to do it for every sale. For instance, "If you don't invest in the (annuity, penny stock, etc.) now, you will miss the (guaranteed rate, huge gain, etc.)"

This leads to the fear you will miss out on making money while others prosper. Since 2008, many are using fear of another severe recession and stock downturn to sell gold, coins and annuities. Many shysters will prey on the fear of the unknown to sell their newsletters or investment prowess.

Greed also leads us astray. Many of the Ponzi schemes are built on greed and promised returns that are too good to be true.

It is always a good idea to take a step back when emotions such as greed to fear are used to make any financial decision.

The perfect example of greed in the markets is a bubble. In recent years, we have experienced the dot-com (tech) bubble and the housing bubble. People get into a mindset where they think they can't lose and overextend themselves. Fear can also lead to damaging results. For instance, how many people sold at the bottom of the market in early 2009?

I received a question about a serious fear monger from clients this year. The premise is that the end of America and the dollar is coming on July 1, 2014. This is based on the Hire Incentives to Restore Employment (HIRE) Act (also referred to as HR 2847) that was signed into law back in 2010.

It includes a provision requiring foreign financial institutions to report information about US taxpayers' overseas assets to our government. This requirement begins on July 1st of this year. A scare monger, who shall remain nameless (but can be easily Googled), is spreading the premise that this law's implementation will "threaten our very way of life."

The warning gets better -- with more dire predictions and the need to purchase the firm's newsletter. Of course, they are the only ones who can lead you safely through the coming armageddon. The newsletter is laced with half-truths, manipulated charts and dire endings.

The main thing to remember when receiving any propaganda through email or mail is to check out the sender and the message. You can also call or email a trusted advisor who can investigate and help to put the data in perspective. In this case, it turned out the owner of the firm issuing this newsletter had been convicted of fraud.

Many email scams suggest that untold riches can be had for a nominal fee. One of the more famous is the 'Nigerian Fraud.' A foreigner (usually a prince) needs to get millions of dollars out of his country and you are the kind stranger who can help. They use the bank account information that you provide to impersonate you and wipe you out.

I had a client ask about an email claiming they were owed a large amount from a will due to an unknown distant relative. It would be great if millions fell into your lap but the 'too good to be true' guideline is a must to remember.

Penny stocks are also used frequently in scams. If you caught the movie, "Wolf of Wall Street," it portrayed a money hungry New York stock broker who used penny stocks to make his fortune at the expense of his customers. Newsletters and emails are sent out to drive up the price of a thinly-traded, little known, unregulated company's stock. It's called a pump and dump. The promoter will pump up the stock price through misleading statements and promises of riches. The price of the stock goes up on added volume and thus convinces more people to jump onto the band wagon. The promoter dumps shares at the highs and then stops promoting and driving up the stock price and the stock price plummets, leaving others holding the bag.

Typically, all scamsters will try to emotionally motivate you either through greed or fear.

Therefore, never make snap judgments when deciding with emotion. Discuss your decision and the information with someone who can be objective and whom you trust. People can use fear to manipulate or steer people in the direction they wish.

When all is said and done, the world can only end once -- and I don't think it will be tomorrow.

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Judy Loy, ChFCâ, is a Registered Investment Advisor and CEO at Nestlerode & Loy Investment Advisors, State College, Pa. A graduate of Penn State University, Loy has been with the firm since 1992, assisting clients with retirement planning, brokerage services and investment advice. She can be reached at
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