MONEY: 12 Cognitive Biases That Endanger Investors

Good thing I have a team. Otherwise, I’d be sitting, guarding my “pirate’s chest” of gold coins. I don’t know what bias being a Gold Bug is, but I have it bad. The thieves in DC are robbing us poor folk blind. And, what’s worse, folks are clueless. Argh!

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12 Cognitive Biases That Endanger Investors: “

Before Todd Harrison created Minyanville, he was an options trader at Morgan Stanley, eventually becoming President of Cramer Berkowitz, where he toiled as head trader at Jim Cramer’s hedge fund.

Todd has an excellent analysis of the various biases that endanger investors.

Here is the full list:

1. Confirmation Bias
2. In-Group Bias
3. Gambler’s Fallacy
4. Post-Purchase Rationalization
5. Neglecting Probability
6. Observational Selection Bias
7. Status-Quo Bias
8. Negativity Bias
9. Bandwagon Effect
10. Projection Bias
11. The Current Moment Bias
12. Anchoring Effect

Check out his explanation and descriptions here.



12 Cognitive Biases That Endanger Investors
Todd Harrison
Minyanville January 17, 2013

(Via The Big Picture.)



GOLD: Asian gold theft crisis in the UK

The great Asian gold theft crisis
With its value at a record high, gold has never been more attractive to thieves. Now burglars with metal detectors are targeting the homes of British Asian families for their collections of high-quality ‘Indian gold’ jewellery
Emine Saner        Emine Saner
Tuesday 31 January 2012 15.00 EST

*** begin quote ***

Five weeks ago, she came home one evening to find the door ajar. The downstairs floor of her house was relatively untouched but upstairs the bedrooms had been ransacked – drawers opened, wardrobes emptied, clothes and belongings scattered everywhere. “It was such a huge shock,” she says, sitting on the sofa, her voice breaking slightly. Her husband, Mr Rashid (neither want to give their full names), a big man sitting across the room, shakes his head. “They took it all,” he says.

The thieves who broke into this semi-detached house in Earley, near Reading, stole around £70,000-worth of gold jewellery. To those who are not from a south Asian family, it might seem remarkable to own so much valuable jewellery, but families such as the Rashids (Mr Rashid runs a small business) live in ordinary houses and are not particularly wealthy. Their gold collection – elaborate necklaces, rings, earrings and bangles – is treasure that has been handed down from generations of their families in Pakistan or bought as wedding gifts. It’s our savings, our security, says Mrs Rashid, visibly upset. If, in future, the family needed money, they would have sold some pieces. “It’s like paying a mortgage for 20 years and then having a house worth thousands of pounds afterwards – it’s the same thing with gold,” she says. “Our parents gave it to us, we would have given it to our children, they would have given it to their children,” says her husband. They tried to put their gold in the bank, but “there were no lockers available. Everyone is looking for one.”

*** end quote ***


You have to not look like a victim. And, make it hard to find.

Crazy that you can’t be secure in your own home.

Tie that back to the UK’s dole, gun laws, and generally tolerant attitude towards crime.

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INTERESTING: Time to nuke Freddy and Fannie!

Rethinking Part of the American Dream

*** begin quote ***

In hard-hit Las Vegas, nearly 59% of households own their homes, but only 15% to 19% of households own a home in which they have any equity left.

For many, the American dream of home ownership turned into a nightmare of debt and foreclosure. Some people should rent.

As late as the 1930s, a U.S. mortgage was generally a loan for three to five years, at which time the borrower had to pay it off. Then the government fostered the 15-year fixed-rate mortgage—and eventually the 30—and the concept that the homeowner would pay off principal in monthly installments.

*** end quote ***


Several thoughts occur to me here:

① 15 to 20% of homes left with the owners having equity? All those senior citizens who bought retirement homes? That’s astounding.

② Talk about malinvestment. (That’s Austrian economics term. See below.) Detroit, Flint, and Gary are destroying houses to avoid providing gooferment services. We as a society have our wealth destroyed by such action. Are there no homeles there?

③ It would seem that the FTC and the TREASURY / FED / SEC could stop this disaster anytime they want to. Regulations of minimum down payment like stock margins. Rules about honest disclosure. Limits on what banks can resell as “securities”. AND, the biggest rule, the originator get stuck with defaults! No more package it and forget it. (But then we’d see just how crappy the economy is. And, how many banks would be insolvent. It’s in the Gooferment’s interest to keep putting lipstick on the is pig. Pucker up! Guess who’s going ot have to kiss it?

④ I remember reading that Freddy and Fannie make the economy more uncompetitive and more “rigid” in that owning a home meant the workforce could not adapt to new opportunities in new locations. A high percentage of folks renting means they can move more quickly. Didn’t the Mayans force migrations by burning the village and forcing them to move hundreds of miles? Is this our modern equvalent?

⑤ Speaking of Freddy and Fannie, I see where bailing them out is going to be the “mother of all bailouts”. Shouldn’t we put them out of their, and our, misery? Time for a Constitutional Amendment banning all GSEs! (Gooferment Sponsored Entities)

⑥ Why don’t we bring back the 30 year Treasury Bond as a method of financing the deficit and easing the pain we are facing? Or is the GOoferment afraid of what that 30 year rate will be?

⑦ On HGTV, there are a lot of home buyers, some first timers, who are buying big ticket homes with nearly nothing down. Several hundred thousand dollar mortgages and they need “mortgage assistance”, seller paid closing costs, and even the tax credits to make the numbers work at all. And, in the cases of two income “families” (i.e., DINKs), one paycheck is completely going to the mortgage. Isn’t that a recipe for default in a job loss scenario?

⑧ Perhaps, it’s time for multi-generational households (i.e., grandma and grandpa buy with their retirement money; mom, dad, and the grandkids bunk in)? Wasn’t that the model before Social Security allowed Grandparents to escape to Florida? Makes the Grandparent able to dodge the nursing home.

⑨ Interesting that the Wall Street Journal paywall isn’t very encompassing.

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“Panics do not destroy capital; they merely reveal the extent to which it has been destroyed by its betrayal into hopelessly unproductive works.”

— John Mills, December 11, 1867, on Credit Cycles and the Origin of Commercial Panics

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GOLDBUG: Never ask a gold bug for comments!

Friday, October 16, 2009

Buying Gold?

*** begin quote ***

We may or may not face serious inflation but I would like to hold as much gold as possible either way. It might cost me a couple bucks more for the same thing but worst cast I will just laugh about that when I buy for less in a few months.


*** end quote ***

Gold — bullion; not “collectibles” — currently has a 10% premium. Silver seems to be about 12%. (Palladium is an “interesting” play; rarer than platinum, but priced 60% below gold?) Unfortunately, that’s a lot of “commission” to pay. (A loan shark’s vig?) In the past it was as low as 2%. A mutual fund with a 10% load would be found unacceptable; why should we treat bullion any different. Hold it for 10 years and it doesn’t feel as bad.

The other consideration is what are your protecting against. In an “orderly” inflation scenario, other investments may “surf” the riding tide of inflation (i.e., real estate; stocks). In a “disorderly” inflation scenario (e.g., hyperinflation like Rwanda or pre-WW2 Germany), then you want the bullion coins in your possession. (Or, where you can get to them in a pinch.)

Bottom line: In hyperinflation, bullion coins will overcome the premium in a heartbeat. But what’s the probability of it happening? Tough call.

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MONEY: Ignore the 5% “rule” at your own financial peril

Tales From Lehman’s Crypt
Published: September 12, 2009

*** begin quote ***

“I spent a long time being very angry,” says Mr. Schaefer, the former Lehman executive turned gas station owner. “Angry for working so hard and doing so much. More importantly, for my family and all the time I was away traveling — the time I put in away from them. Now all that money I earned, the money paid in stock, is gone. I can’t go back and remake it.”

*** and ***

When Lehman closed its origination business, Mr. Linton lost his job. Rich and single, he has pursued a life of leisure since then — sailing in his 37-foot boat, playing jazz trombone and, at the moment, taking a week to learn how to fly Russian fighter jets and gliders in New Mexico. He briefly considered attending culinary school.

Although Lehman laid him off in early 2008, his departure turned out to be a boon for Mr. Linton. Being forced out convinced him to bet against the firm’s stock as a counterweight against the Lehman shares he still owned, which protected him when the stock’s value plummeted. Combined with a well-timed sale of his Manhattan apartment and a stream of income from real estate investments, the moves gave him financial padding that frees him from job worries.

“I have been fortunate to have some nice toys,” he says. “And they are all paid up. It’s a nice situation to be in.”

*** end quote ***

I don’t understand a lot of things.

I didn’t understand how smart people, with dependents, working on Wall Street, don’t have life insurance. 91101 exposed they didn’t.

I don’t understand how these ex-Lehman people, who worked on the Street, have all their portfolios so heavily weighted with Lehman. Guess they never heard of options or derivatives.

I don’t understand a lot of things. Wall Street’s “rules of thumb” have been time-tested. Ignore them at your own peril.

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MONEY: Your Home Is Not An Investment

Your Home Is Not An Investment
from by Jim

*** begin quote ***

There are many benefits to owning a home and I’m a huge fan of it, but don’t justify buying a home by thinking its home is an investment. It’s not.

It is, however, a place to live, a place to make your own, and a place to make yours. It’s a place to put down roots, a place to raise a family, and a place to grow old in. It’s a place to call your own, it’s just not an investment. It’s a home.

*** end quote ***

Had this discussion a few weeks ago with an OLDER friend and his family. Couldn’t seem to break thru that “rent” was not “lost”. Sigh.

It’s only an investment if you get rent for it.

Frau is enamored with HGTV and all the renovation, vacation, and first time. (I don’t understand how they can ignore labor cost in the renovations. I don’t understand buying an international vacation home for several 100K$; how many times can you go there? I don’t understand first time buyers who exceed their budget consistently.)

It’s only a legacy.

It’s not an ATM like how people were refinancing to get cash out.

Everything is great when the market is going up; down, not so good.

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RANT: ROADS; no longer the third rail


*** begin quote ***

I drove in upstate with a friend of mine whose a libertarian. We saw all the road constructions (quite annoying to be honest) and he stated it’s unfair he needs to pay for any construction to the roads in an area he never drives in. I had no good answer. Thoughts?

*** end quote ***


OK, he’s absolutely correct. THe gooferment one size fits all requires us to pay for stuff we will never ever use. It’s the only entity, with its monopoly on initiation of force, which can require us to pay for what we don’t need, don’t want, can’t use, and a absurdly high price. Roads are the third rail of Libertarian philosophy. Because the sheeple can’t conceive of roads being “done” by anything other than the government. Walt Disney, private home owner associations, and private roads all exist in the “real world”. There needs to be a revolution in our memes. How about selling the interstate to WalMart and UPS? Think they would have construction delaying their paying customers? ROFL! SO why ask me? You know I am a raving little Llibertarian!  

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You expected me to say something different?

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MONEY: Coins may be an inflation hedge?

Mass Inflation Ahead — Save Your Nickels!
By James Wesley, Rawles — Editor of
Updated, April, 2009

*** begin quote ***

In five years, the circulating nickel as we now know it, will be history, and it will be treated with nearly the same reverence that we now give to pre-’65 silver coinage.

*** end quote ***

Wonder if I buy some bags of coins from TD. They have the free coin sorter. Hmm.

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LIBERTY: The Gooferment is in charge!

High court won’t block Chrysler sale
Jun 9 06:27 PM US/Eastern

*** begin quote ***

WASHINGTON (AP) – The Supreme Court has cleared the way for Chrysler’s sale to Fiat, turning down a last-ditch bid by opponents of the deal.

The court said late Tuesday it had rejected a plea to block the sale of most of Chrysler’s assets to the Italian automaker. Chrysler, Fiat and the Obama administration had warned that the high court’s intervention could have scuttled the sale.

A federal appeals court in New York had earlier approved the sale, but gave opponents until Monday afternoon to try to get the Supreme Court to intervene.

*** end quote ***

The bondholders really couldn’t expect “justice” from a gooferment court.

Talk about a stacked deck!

The President’s plan taken before the Government’s Court. And, you expected a different result.

Watch the bond markets now! Nothing is safe from gooferment manipulation.

Now what happens to the Indiana pensioners who just got screwed?

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MONEY: Obama’s “Bailout Bonds”

Bailout Bonds?
by Llewellyn H. Rockwell, Jr.

*** begin quote ***

The Obama administration is cajoling investment companies to create bailout bonds. These would be similar to the bonds that wartime presidents created to find sucker-investors for their wars. Americans were browbeaten into buying them as a patriotic duty. So too those who say “yes, we can” to the bailouts will be asked to do their patriotic duty, and buy the debt of loser companies.

It’s all part of the war on depression, which is destined to be as successful as the war on drugs. But, hey, if it is a good investment, why not buy bailout bonds? Well, there’s a problem. The bonds represent credit extended to companies and projects that are proven market failures. Creating these bonds is a way of institutionalizing the principle of buying low and selling lower.

*** end quote ***

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An even MORE important point is who’s going to buy ANY of the US Gooferment debt?

When the pundits say ONE or TWO Trillion Dollar Deficit, (that means they haven’t or can’t tax it to zero), there are really only TWO choices: INFLATION to monetize the debt (A fancy way to say “we’re going to screw everyone who hold dollars”; that’s why the Chinese with their 5T$ are upset. Inflation is a tax on every dollar that currently exists. How many do you have?) —-OR—- BORROW it. (The Treasury issue notes and bonds, basically IOUs, to folk who think they might get their money back with interest.

Who’s going to buy 2T$ worth of debt?

Not the unemployed. Not the “scared money”. Not the Chinese. Not the retirees who have taken a 50% haircut in the market. Not those with 401ks and IRA that have taken the same haircut or worse.

Who else has savings to loan Uncle Sam?

Watch for the interest rates to rise. See bond buyers KNOW their biggest risk is inflation. For those of us who lived thru the Carter Stagflation, we remember the Treasury couldn’t sell 15% tbills because price inflation was running 20%. History WILL repeat itself.

Gold and silver. Gold and silver.

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GOVEROTRAGEOUS: Cramer (a leftist) points out how O doesn’t get it!

Posted March 09, 2009
Cramer Takes on the White House, Frank Rich and Jon Stewart
By Jim Cramer

*** begin quote ***

Suddenly, bloggers, opinion people, columnists and, yes, pundits who haven’t paid attention to anything I have been saying or writing for the past 18 months are all over me. Suddenly, I find myself in the center of a firestorm over Obama’s economic policies, taking enfilading fire from the “liberal” media (from serious columnist Frank Rich to entertainer Jon Stewart) while being defended by Rush Limbaugh, the standard-bearer for the Republicans.

*** and ***

The answer lies in the way the two administrations handled criticism.

The Bush administration, I believed, simply chose to ignore my warnings, perhaps because of a brutal combination of ideology, fecklessness and complacency.

*** and ***

President Obama’s team, unlike Bush’s team, demonstrates a thinness of skin that shocks me. When I somewhat obviously and empirically judged that the populist Obama administration is exacerbating the crisis with its budget and policies, as evidenced by the incredible decline in the averages since his inauguration, I was met immediately with condescension and ridicule rather than constructive debate or even just benign dismissal.

*** and ***

The markets thought he could stop it; hence the giant relief rally when he was elected. But in fewer than 50 days of his ascendancy, the markets’ hopes were totally dashed and the averages are now forecasting the worst decline since the Great Depression. As someone who listens to what the averages are screaming, I think they are accurately predicting the future.

I welcome any serious exchange with the administration on the issues that are not beyond my ken: fixing house price depreciation, stopping the destruction of wealth as demonstrated by the stock market’s plunge, and solving the banking crisis before we nationalize every bank.

*** and ***

It’s time to get serious. It’s time to take the issue from the pundits and from the left and right, and put it where it belongs: serious non-ideological debate to put out the real firestorm, the collapse of the economy from Wall Street to Main Street and the ensuing Great Wealth Destruction for all.

But if it stays ad hominem, we will all be betrayed and the train wreck will become inevitable.

*** end quote ***

The inept politicians from both sides of the aisle have destroyed the investments of most people. And, all we get from them is “spend more” and “borrow more”.


You’re putting future generations in a hole they will never get out of.

Let the failures go bankrupt. Tough medicine.

We are training future generations NOT to invest.

I’ve had two conversations that are noteworthy.

A young woman has pulled out of her 401k because the losses have eaten into her employer’s contribution and hers. A doctor is moving from equities to bonds and his “financial advisor” at the brokerage house thought it was a good idea (i.e., he gets a commission on trades; not results).

The Market’s P/E ratio is either in or going into the single digits. (Last time that happened the market doubled in a year!) The “natural recovery” from a downturn has already begun. See the uptick in home sales as the “affordability” measure is it’s lowest in decades.

Note to O: (1) Reinstate the uptick rule. (2) Aim the corporate beggars to the bankruptcy courts. (3) Grab your various regulators and ask them to resign. (4) Eliminate Federal guarantees of ARMs, Interest only, and any mortgage that’s not 20% down 30 year fixed “conforming”. (4) Tell the FBI anf your Federal Prosecutors you want some FRAUD convictions for all the bad paper. (5) Tell the SBA that you want a plan to stimulate small business by the end of the day.

Cut the spending, cut the debt, cut the waste.


Like that’s ever going to happen!

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MONEY: TLOCM “the land of critical mass” is 10M$!

Bob Brinker talks about “the land of critical mass”. This is the place in your life where money is no longer a concern and you are able to live the lifestyle of your desire.

5 year @ 12 month ladder = 60 units

100k per year = 5% of 2,000,000

5 year CDs @ 5% is 10 M$ = 60 monthly 5 year CDs @ 166, 666$ for each CD

So the “land of critical mass” is about 10M$.


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MONEY: Principal Group?

On Bob Brinker’s radio program today, during the second hour, had a caller call and report that one of the Principal Group’s Stable Value Funds was refusing redemptions. That’s earthshaking. Bob advise legal counsel be retained. Doesn’t sound good for Principal?

Also, on the show, a caller reported a 30+% loss in an California Muncipal Money Market fund. That shouldn’t be possible?

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MONEY: CD Ladders for the novice.

What are “Ladders?

A ladder is a climbing device that is characterized by “rungs” that one steps on as you move “upward”. Oh, you knew that. In the financial world, ladders are a bundle of financial assets that have different maturities over time. Those assets could be bonds with different due dates; as opposed to stocks that are an equity interest.

Ladders are of interest in that one can construct a portfolio of bonds that has essentially a different characteristic from the underlying components. Bonds have some typical characteristics: amount, term, rate, and rating. Using a “ladder”, you can create a portfolio that has an higher effective annual interest rate than you’d anticipate. Using a different type of “ladder”, you can create your own version of a bond mutual fund. And, using again a different type of ladder, you can create your own “pension fund”.

“Certificate of Deposit” ladders, my particular favorite, are essentially a bundle of individual certificates of deposit that you consider as a unit or a “portfolio”. You can use all sorts of bonds and even preferred stock as you see fit. My preference is for FDIC insured Certificates of Deposit. (Please be sure to check with the FDIC website. This is pretty much as close to certainty as you can get.)

One drawback of say one year certificates of deposit is that of the low interest rate; use a ladder to get the five year rate. One drawback of a bond mutual fund is that variability in the value of the fund as interest rates fluctuate. One draw back of a pension from a pension fund is that the monthly pension goes away at death.

If you look into the technical descriptions, you will find that our “CD Ladder” overcomes many of the drawbacks. Low one year CD rates can be overcome by rolling five year CD terms. (More about that later) The fluctuation of a bond fund can be overcome by the date certain aspect of a CD; you always get your money back regardless of interest rates. And, the pension check disappearing at death can be overcome by the ladder goes into your estate when you die.

Laddering is a hedge against market volatility. If rates go up, you will be able to invest in a higher rate CD; bond funds lose value when rates go up. On the other hand, if the rates go down, at least you’ve got the other CDs invested at a good rate for longer and the not all of your eggs come due at the same time; bond funds go up in value but pay less interest at the new rate.

To create a CD ladder, you buy several CDs with varying lengths and interest rates. Let’s just use a simple ladder that I recommend to old retirees. The “12 by 5”! Think 60 Five Year 5% CDs spread out over the Twelve Months across Five Years that mature every month. Lets use a portfolio of 60k$ for ease of thinking. Every month, they have a 1k$ CD to roll over. They can take the interest 50$ and party. Trivial for a pension, right? But these are rich senior citizens. Make that a 50K$ CD and that’s 2.5k$ per month. Or, 30k$ per year. That’s a 3M$ portfolio. Better than Social Security. And, it safe, secure, and can be created by an individual with ease. Sleep easy!

OK, you don’t have 3M$ idle and let’s look at another example.

Emergency funds, or savings, are nicely addressed by a “4 by 5” ladder. Think 20 Five Year 5% CDs spread out over the Four Quarters across Five Years. Lets use an Emergency Fund of 100k$. That should cover most emergencies I can think of. Every quarter, you have a 5k$ CD that comes due and you roll it over. Should an emergency come that requires tapping the fund, you just break the last CD. Usually the penalty is just the interest. Some banks will even give you a loan at a very cheap rate, pledging the CD as collateral. It’s a little hard to crack into them, so you’re less likely to call an emergency that isn’t a true one. Since you’d lose money by doing anything with them, you’re motivated to figure out an alternative. But, if you need them, they are there. I like borrowing against them as opposed to cashing them.

Entry into the program is relatively simple. When starting, we bought five “First Quarter” (i.e., 1, 2, 3, 4, and 5 years), a Ninety Day for “Second Quarter”, a One Eighty Day for the “Third Quarter”, and a Two Seventy Day for the “Fourth Quarter”. Then, at each quarter, we “exploded” the roll over into the five “children” (i.e., 1, 2, 3, 4, and 5 years). Hardest part was to explain to the Bank Folks what we wanted. We had to be very focused. Exiting from the program is just stopping the roll overs.

You may need to be a little tactical in getting to the target distribution. Banks usually have “special deals” for odd terms. Recently, when we were setting up the previously described “4 by 5”, the Bank had a “sale” on some odd terms at significantly higher rates. In looking at the odd terms, it was possible to “steer” them into giving us what we wanted.

Opinion: These are essential for old retirees. But of limited usefulness for young workers, except for use as emergency funds and for the savings layer of their financial pyramid, where they serve very nicely.

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MONEY: Might your employer be at fault for your 401k loss?

October 11, 2008 Your 401k Plan – Breach of Fiduciary Duty? Posted by Karen DeCoster at October 11, 2008 06:24 AM

* begin quote *

Some friends and family have asked me to advise them on their choice of investments because they are down – an obvious point – in their 401k plans. A bit late, and there’s not much you can do anyways. But …prior to the meltdown, so few people were really willing to understand and believe that there was a financial storm in their future.

* and *

While snooping around, I immediately noticed something in this Wachovia plan that is epidemic nowadays. There is absolutely no option to invest in something that is low in risk. Typically, if you are predicting that the market will go South (as I have been for years), you’d look for a 100% US T-Bill option in your 401k, even if you only park it there in the short term. However, this person’s plan had absolutely no low-risk option whatsoever.

* end quote *

I know that everyone TRIES to keep liability at arm’s length from the business.

BUT, (there is always a big butt),

in this case, I think there may be a claim that has some merit against the employer and the fund company.

In my younger days, I would sneer at derision at “guaranteed return” offerings. I still do.

(Look at all those “safe” bond funds who have Lehman bonds in their portfolio, and tell me about safe! Money market funds as well. Icelandic banks. Inet banks. Yada, yada, yada!)

If a 401k has no “guaranteed” offering, I suspect that a claim could be made and imho would be paid off quietly.


Disclaimer: I’m not a lawyer, CPA, or even “thin, young, and handsome” any more. (Any More?)

Get me on the jury, present me with a good case, and I find for the “little guy” all the time.

Just my nickel’s work. (Two cents after inflation?)

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