Attorneys are expert in law and litigation and not necessarily in investments. Nevertheless, one does not practice law, particularly business and trust law, for decades without learning some basic truths about investments in general. This article is to share some common sense truths learned by a lawyer who has sat through and been involved in thousands of investment planning sessions…and seen the successes and failures over the decades. It is common sense, not deep study…but it seems to work for most of the estates, trusts, and equivalent accounts we work with.

Often our clients ask our opinions about particular investments or about advisors. Occasionally, we are asked about criteria to utilize in pondering how to invest in stocks and bonds, real estates, limited partnerships, etc. and about appropriate rates of return. Since we are often trustees and executors, or advising same, the ability to evaluate investment performance is at times required.

Of course, the Prudent Investor Rule and the Unitrust rules impose upon fiduciaries a specified type of return on investments and a person considering what to expect on returns would do well to read those articles since they express what the experts think a reasonable return on investments would be in this day and age.

Another good place for an investor to learn some truths about appropriate investment is how the Courts and juries have traditionally treated those charged with obtaining a conservative but appropriate return on investments-the executors and trustees who handle the monies left in Trust. For the last hundred years both the Courts and legislatures have laid down minimal requirements for performance that a “reasonable fiduciary” should obtain while handling investments. Since the decisions have been rendered over decades, their instructions and lessons are not limited to a particular market or boom or bust period. The lessons are universal.

Their lessons are useful to keep in mind since they derive from the objective consideration of Triers of fact who, inevitably, have heard both sides of the argument in the trial or hearing. And their lessons are at times surprising. Roughly, the following truths seem appropriate in most circumstances.


  1. STAYING IN CASH IN NOT SAFE IN THE LONG TERM: Note that simply sitting in cash or even low interest money market funds has been held by the Courts to be a breach of a fiduciary’s duties in wisely investing. With inflation historically at two to four percent in typical times (and up to 18% or down to .00% at other times) one must expect erosion of investments if one does not seek to earn at least four to five percent. Inflation erodes any asset that earns less. And the loss is significant. Assuming 3% inflation, if you are in cash now that earns .05% in savings, you lose 2.5% a year. A hundred thousand dollars, after ten years, would be worth $75,000 at that rate. Further, since you pay taxes on your earnings, you actually would be down to less than sixty five thousand dollars in real money by choosing that investment. Thinking you are being safe, you have actually nearly guaranteed a loss of over one quarter of the value of the asset. The courts have held that a breach of fiduciary duty. For short periods of extreme turbulence, cash or near cash investments may make sense. In the long term, they are inevitably a bad choice.
  2. TIME MATTERS IN RISK: The studies clearly show that a diversified portfolio in the stock market has a ninety percent or greater chance of earning a profit for you if invested for ten years or more and that the annual appreciation if reinvested will exceed six percent on the average. However, if the window for investment is five years or less, the chances of success drop from 90% to about 60%. If you are going to need the money in less than ten years, the stock market is a real risk. If you will not need it for more than ten years, it is a very safe and profitable investment.
  3. DIVERSIFICATION MATTERS: Again, the studies are clear: no class of investment is always beneficial. All go up or down at one time or another. There is no “safe bet.” Even cash, as seen above, is a bad investment in times of inflation or if the return is not significant. The need for diversification of types of investments seems a lesson that is apparently forgotten every ten years by the bulk of Americans. We just finished a period in which laypersons were convinced real property could not decline and borrowed heavily to buy it. Ten years before then, stocks “could not lose” and people borrowed heavily to buy them. The collapse in real estate of 2006 was astonishing to these people. When the stock market plunged in 2001, the surprise was widespread. The only surprise should be---that anyone thinks any investment will continue to appreciate forever. All investment classes sooner or later go up. All investments sooner or later go down. To maximize return, you need a mix of investments ranging from stocks to bonds, from real property to cash equivalents, from domestic stocks to emerging market stocks. The more you diversify, the less risk you run. The moment someone advises you that a particular class of investments is a sure thing and bound to appreciate no matter what…find another investment.
  4. MARGIN BUYING IS RISKY. Again this is a lesson that seems to be forgotten by the bulk of people much of the time. While all investments have some risk, if one borrows money to maximize return, the risk is greatly increased. In the first part of this century, it was those who borrowed to buy stocks that faced catastrophe. In 2006-8, those who borrowed heavily to purchase real estate or used equity lines to obtain cash faced catastrophe. If you own an asset and the market goes down, you can “tough it out” and merely retain the asset until the market turns around, as it always does. But if you have borrowed money to buy the asset, you face nervous creditors who may call the margin or face payments that are significant at the very moment that your assets are depleted.
  5. HIGH RETURNS ARE SUSPICIOUS. “If it’s too good to be true…it isn’t true.” That axiom is, itself, not always true. All of us know people who have doubled their money with some remarkable investment. Real estate made many millionaires in the last decade. What is probably more appropriate to conclude is that what is too good to be true will soon not be true. Nothing goes up forever and if you are making very good, indeed, surprisingly good money in any investment, recognize that it will soon end, take your profit and exit.
  6. THERE ARE NO EXPERTS. It was perhaps fifteen years ago that, more as a stunt than as a scientific inquiry, a famous newspaper tried throwing darts at a board with stocks on it and purchasing the stocks based on what the darts hit...then compared it to following the advice of ten of the best gurus in the field. They did it for a year. The dart board did not win…it was simply just as good as the best of the advice received. Anyone brilliant enough to invariably chose right…already chose right and left the market and does not have to waste time telling you how to invest. Anyone with a sure fire scheme to beat the market would not be selling it to you if it worked. He/she would be beating the market.
  7. PAYING BY THE HOUR IS THE CHEAPEST ADVICE THERE IS. If you want investment advice that is truly objective, do not ask advice of someone who is paid money only if you buy the investment. This is so obvious that one would not think it was necessary to advance, but the number of people who rely on investment brokers paid a commission or investment advisors who are directly or indirectly paid predicated on the number of trades (either as kickbacks or by you) is remarkable. Investment advisors can be found who charge by the hour or by the total increase in your portfolio. They are the only ones whose advice is not subject to the powerful influence of conflict of interest.
  8. THERE ARE NO NEW MIRACLES THAT HAVE ALTERED THE PLAYING FIELD. The first new product that was going to revolutionize the stock market and could never go down was…tulips. In Holland. The “bust” destroyed most of the middle class of Holland and much of the upper middle class of England. That was four hundred years ago. We just finished two recent pyramids (real estate and, before that, the high tech boom) and in both cases “experts” carefully explained that the vagaries of the new technology and market no longer created a situation in which investors need fear a decline in the market. The Dow was supposed to hit thirty thousand by 2003, the pundits claimed in 1999 and real estate would appreciate at ten percent or more a year for at least a decade a real estate expert advised this writer in 2004.Historically, diversified investments will appreciate at six to eight percent if kept in a diversified portfolio over time. If your asset appreciates faster than that, it will eventually stop or decline. If slower than that, it will eventually accelerate. What has occurred for four hundred years is not going to stop because of a particular new technology or popularity of a type of asset. Sooner or later the medium return will occur.
  9. DEBT IS DANGEROUS. CREDIT CARD DEBT IS RUINOUS. Your best investment is not to owe money. It not only allows you to save interest payments but gives you freedom to determine if you wish not to sell due to tight money, and allows you, if you have developed a cash reserve, to buy from those who do not apply this maxim. The more you owe, the less freedom of action you have. Margin appreciation is nice, yes. To enjoy appreciation on a million dollars of assets that only cost you one hundred thousand out of pocket as a down payment is fine so long as nothing wrong happens. But if that asset drops or you lose your income stream, that margin appreciation not only disappears but you are facing a very dangerous situation in which you may have to sell at a loss. Credit cards usually have terms that indicate that even a day late in payment allows permanent increase of interest to sums appropriate to organized crime. It is typical to pay 22% interest or more. Thus, the moment things are tight, you face an increase in interest that is disastrous to your budget. The best recipe for investment? Stay out of debt.
  10. 401KS ARE THE BEST INVESTMENT AROUND. Given the tax benefits, the 401K should be the very first investment you seek to maximize. You use before tax dollars to invest and do not pay tax on the income you earn until you retire. That, alone, is a thirty percent bonus from the government on the investment. Same with IRAS.
  11. THE FAMILY HOME IS A GOOD INVESTMENT. IT IS NOT A BANK. Given the tax benefits of interest deduction, property tax deduction and capital gains protection inherent in the family home, it can be a very good investment…but only if one buys what one can afford and does not utilize equity lines to eliminate equity. The home will appreciate about six percent a year over a period ten years or longer. Not every year, but on the average. If it goes up faster than that, it will eventually stop or go down long enough to equal out. It is where you live, not your primary investment in life.
  12. TAXES MATTER. A GOOD CPA IS MORE VITAL THAN GOOD INVESTMENT ADVICE. TAXES CHANGE. Your investment horizon is twenty to thirty years if you are smart. In that period of time, the tax laws will radically alter once, and substantially alter two or three times. In the last thirty years, credit card interest was deductible…then not. Income tax and capital gain rates have gone up…then down…then up. Estate taxes plummeted…and now may go up again. Etc. etc. In California, combined with the Federal tax rate, your operative rate if you are making good money will be 43% today. Absent tax planning, a return of six percent becomes a return of less than four percent. It will barely keep ahead of inflation. Your only chance to make real progress…is good tax planning. Find a good CPA and get his or her advice. Plan ahead. But never chose an investment that will only have tax benefit. That was the mistake of those who invested heavily in limited partnerships before the collapse of the Savings and Loan system fifteen years ago. Seek tax benefits, yes…but if that is the only benefit of the investment, find a different investment. Taxes are never one hundred percent…thus a loss is always greater than the tax benefit. You need investments that will appreciate or generate a profit.
  13. THE GOVERNMENT WILL NOT SAVE YOU. There is only one entity worse at saving and investing than you are. The United States government. The National debt skyrockets while we lower taxes that are needed to reduce it. We go to war and borrow the money to do it, previously predicting that oil from the conquered nation will pay the entire cost of the war. To expect this lack of economic intelligence to provide security to you when you retire is foolish. If Social Security or equivalent programs generate significant sums to you when you retire, consider it frosting on a cake.
  14. HAVE THREE MONTHS COST OF LIVING IN READY FUNDS. Add up your monthly nut (including taxes) and develop an emergency reserve to utilize if things go badly for a few months. Put the money in money market or equivalent so you can access it immediately. In that manner, you will not have to sell longer term assets at a loss due to pressing need. More, you will not have to go into debt.
  15. UNDERSTAND THE IRON LAW OF RECOVERING LOSSES. If you lose ten thousand dollars you will not earn interest on it to make up the loss when the market recovers. You have to use other funds to recover. Thus, losing ten thousand means that when a recovery occurs and one can make eight percent on money, you will not make eight hundred dollars annually on that lost amount. As such, the more you go down, the harder it is to generate an income flow to recover. It is thus better to earn less than to earn more, lose more, and try to recover. Put even more simply, it is better to make a steady 9% than 12% which averages twelve by going up and down over a multi year period…since when down, you will be making 12% on far less principle.
  16. HAVE SOME WILD MONEY. Utilizing all the above rules will probably eventually make you a good return in most economies. There are no guaranties but that is a likely result. However, nothing will save you in a very bad economy. Only cash. One problem with the above plan is that it is boring as well and investing needs some excitement. Put aside perhaps five percent of your portfolio and invest in some likely investment that may truly make a great deal of money. You almost certainly will not, but you will also find yourself truly interested in that investment and it will stop your tendency to play around with your other investments.
  17. MUTUAL FUNDS ARE BETTER THAN STOCKS…IF NO LOAD. Again, the studies have shown that attempts to get good return from investing in individual stocks is extremely difficult minus very long term investing and a good deal of luck. Mutual funds which are no load (do not charge you to invest at first) have experts but, more importantly, have diversification. And, as noted above, diversification is almost always better than concentration on a single investment. The studies have consistently demonstrated that your chance of a return if investing in mutual funds rather than picking individual stocks is almost doubled. There are so many mutual funds now existing that you should be able to select one for almost any class of investment. Check their history during bad times…for if you are investing for ten years or more, those bad times must come. Again, avoiding going down in bad times is more important than going up very fast in good times.
  18. DO NOT LOAN MONEY TO FAMILY OR FRIENDS. DO NOT INVEST IN YOUR BROTHER IN LAW’S BUSINESS. An elderly client put it to me quite well. If he invests in family, either via loans or buying part of a business, he considers the money a gift and expects no return. The alternative…to create ill feeling in the family or a feeling of victimization…is simply not worth it. “I make money from strangers where I can be as tough as nails. Family is for giving.” Underlying this approach is an understanding that cutting losses and enforcing rights is an inherent part of protecting one’s assets…and very difficult if family is involved. It is true that most businesses in the world are family businesses and most people who work in business work in family businesses. What we are speaking of here is loaning money and investing.
  19. LIFE INSURANCE IS TO INSURE LIFE, NOT TO MAKE MONEY. Over the years the types of life insurance available have greatly accelerated with plans and methods of great complexity. Some claim to be good investments. However, some simple analysis will indicate they cannot be. If a company has to put aside enough money for the contingency of paying you money upon death, it faces a liability that requires reserves that are available thus what you pay to them is already discounted for their own investment purposes. How on earth can they generate income to you that is competitive with that disadvantage? Life insurance does serve useful economic purposes. It can provide security for a family or business. It has tax advantages for estate and trust planning. It is not, however, a good investment vehicle unless one needs it for those other purposes as well. And, again, get advice on insurance from people not earning a commission on selling it to you.
  20. IF YOU DO NOT UNDERSTAND AN INVESTMENT-SKIP THE INVESTMENT. As just seen with hedge funds, and, indeed, with the plethora of acronym laden investments of the last twenty years, investment professionals love to create extremely complex vehicles which, quite often, seem to generate good returns for some years. But with few exceptions, the more complex they are, the sooner something is likely to go wrong and the collapse seen is usually severe. The reason is simple: most such complex structures boil down to using someone else’s money to achieve margin investments of high proportion. Eventually, usually when the market retreats, the margin is due and without equity, the whole scheme collapses. This does not mean they are illegal. It means they are fragile.Any investment that you put your money in should be simple and straight forward enough for you to quickly grasp what it is about. If it is so complex you need a battery of experts to explain it to you…find something simpler and utilize that. Complexity does not mean sophistication or value. It simply means…complexity.
  21. EMOTION HAS NOTHING TO DO WITH IT. Another elderly client had a rule that is intriguing. He stated that if he found he was getting excited about the investment and its potential he does not invest in it. (In that case it was solar energy in the 1980s.) “Investment is to make money. It is not to have a hobby. I cannot be hard minded if I truly enjoy what the investment is trying to do in the market. I want it to succeed too much. And cutting losses is often critical.” If you find yourself defending an investment with other than economic criteria, examine your motivation. You may be confusing politics and preoccupations with investing.
  22. CUT LOSSES AND RUN WHEN APPROPRIATE. To take a loss and finally sell the investment you were foolish enough to make can be the most important economic decision of your life. It is hard. It is tempting to hold until there is a recovery and if one’s outlook is long term, that can be a valid approach. The problem you confront is that as your investment declines, you lose the ability to make money on each dollar lost when the recovery does return and to pull out, stay in cash, then reinvest, may be appropriate. This writer has often found that emotion can play a role here. Admitting error in choice of investments can be difficult and one can always find someone to argue that the investment’s recovery is just around the corner. This is one of those areas that outside advice can be useful since the person advising you does not normally have the burden of having been the one to select the losing investment. See the Iron Law of Recovering Losses described above.
  23. IGNORE SHORT TERM VARIATIONS IN THE MARKET. The corollary to the above rule is not to overreact to short terms ups and downs in your investment. All investments will show upward and downward trends at one time or another. A good rule is to adopt the “three month” criteria. If your investment remains declining after three months, consider cutting losses and parachuting. If still down after six months, seriously consider selling. Get tax advice since the loss may be useful if your other investments are appreciating.
  24. IF YOU ARE AWAKE AT NIGHT, CHANGE YOUR INVESTMENTS. Everyone has their own level of comfort. If every vagary of your investment causes deep concern, invest more conservatively. You may not make as much money but the money should still be appreciating if you follow the above rules and making a little less will allow you to sleep.
  25. CHANGE YOUR GOALS AS YOUR LIFE CHANGES. The younger you are the more risk you can take since you have time to recover from losses. Further, the closer you are to living off the income from your investments, the more appreciation is of less value and income flow important. Usually, equities decrease and fix income assets such as bonds increase as one ages. Nevertheless, the mix may change but do not invest solely in a single asset as discussed previously. A typical mix when thirty five years of age is eighty percent equities and twenty percent fixed income. A typical mix when sixty five years of age is reversed. The market and your own plans will alter this basic rule but the overall trend is usually the one to implement.
  26. USE THE FIFTY WORD RULE. Another very smart client advised me that he had a fifty word rule. Any investment portfolio that could not be explained in fifty words was too complex to trust. For example, “I have fifty percent in bonds, thirty percent in stocks, twenty percent in second deeds of trust.” Or, “I have most of my wealth in my business 401K and sixty percent of that in equities and forty percent in bonds. The rest is in my home.” That may be extreme. But he died a multi millionaire and slept most nights.