Finance and Investments

The fund promised high and unwavering annual returns, but you had to know someone to get in on it. And that was really all it took to attract credulous investments, that and the sterling reputation of the banker behind it, a financier revered in privileged circles.

“I’ve looked into it” is how one investor reassured a friend who wondered what would happened if the fund should fail. “Name up everywhere, immense resources, high connections, government influence – can’t be done.”

It’s not Bernard L. Madoff’s fund, it’s the one created – and wrecked – by Mr Merdle, the legendary London Banker who brings masses of wealthy, well-meaning people to ruin in Charles Dicken’s classic “Little Dorrit.”

The picture Dickens drew is one which has been repeated throughout history. I am guessing that you gentle reader don’t want to appear in this scenario. Here are some suggestions for you which should make you pause before you jump in.

Generally Accepted Investment Principles
1. Investors should establish an emergency fund invested in short-term safe assets and not held in retirement accounts.

2. The percentage of assets invested in stocks should decline as an investor ages. A popular rule of thumb is to subtract a person’s age from 100 and invest that percentage of total assets in stocks.

3. The percentage of assets invested in stocks should increase with wealth because wealthy individuals can generally tolerate greater risk.

4. All investors should diversify their portfolios across asset classes, and the equity portion should be well-diversified across industries and companies.

5. The optimal asset mix might differ from standard recommendations because of risk preferences.

6. Time horizon, risk tolerance, income stability and other factors influence asset allocation.

The term ‘Generally Accepted Investment Principles’ derives from the term ‘Generally Accepted Accounting Principles’ or GAAP, which refers to accounting standards or rules used in preparing financial statements.