There is a radio spot which has been running in the NY area for David Lerner Associates which is best known for selling non-traded REITs (Real Estate Investment Trusts). They sell their investment products by peddling fear. How so?
The David Lerner radio spot opens with an employee discussing how he understands the pain and uncertainty that so many are experiencing. I would add, that pain and uncertainty is the result of these type of radio spots along with other financial “news” that is reported.
The employee continues in the radio spot to ask what he knows many are wondering – “will the stock market continue to go up or will it have a sharp decline like has happened 16 times since 1929”. What is implied in this statement? Is it that the stock market has not advanced during this time period because of these 16 “sharp declines”? Oh how wrong that impression is!
As we have discussed in these posts before, the stock market regularly declines more than 20% in a year, but the yearly cumulative advances have more than offset the “sharp” declines through time. The stock market has averaged approximately 10% returns for the past 50 years, but investors can only capture these returns by remaining committed to these companies throughout the enviable “sharp declines”.
The radio spot continues asking, “What will happen with interest rates”. Since no one knows for sure, these questions only cause individuals to question what to do, or worse, give them reason to stall with their financial planning. Or they can purchase the products that they peddle.
David Lerner offers non-traded REITs (Real Estate Interest Trusts) as their primary product offering, among other investments. A non-traded REIT does not trade on a securities exchange and, because of this, it is quite illiquid for long periods of time. (Illiquid being defined as an investment that can not be converted to cash immediately or by doing so with a significant loss in true value.) Front-end fees for non-traded REITs can be as much as 15%, much higher than a traded REIT, due to its limited secondary market.
The Financial Industry Regulatory Authority Inc.’s (FINRA) potential rule change announced in February 2014 would take into consideration the various fees and commissions paid to brokers and dealer managers, reducing the share price on each customer account purchasing shares in a non-traded REIT.
“For example, if the prospectus for an offering with a $10 offering price per share disclosed the selling commissions totaling 10% of the offering proceeds, and organizational and offering expenses of 2%, the amount available for investment would be 88%, or $8.80 per share,” according to the FINRA rule proposal posted on the regulator’s website. For years, brokers who sold non-traded REITs have used this illiquid feature as a way to have the illusion of a stable investment, as the price did not reflect the changing real estate market.
So what should an investor do about these “uncertain” times that the radio spot highlights?
First, understand that we live in a world of uncertainty and plan accordingly.
We always conduct a fire drill to prepare our clients for these “sharp declines” by discussing what actions we will take, before and during these events, so that they are able to reach their goals. We do this with the added advantage of maintaining their liquidity and at a reduced cost. The best preparation for these declines is to understand they are common and to have cash available in the short term during these downturns in case it is needed.
Then when the ‘sharp’ decline does occur, you have cash available which allows you to re-balance your portfolio to purchase additional shares of great companies at sharply reduced prices while having additional cash available to await the recovery. Work with a true financial coach and not a salesman.
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