Be careful of tax shelter scams. We’ve all seen it in the mail or online, promises and secrets for the best tax shelters at your fingertips, (honestly folks, do you believe junk mail every time it comes to your door?) Upon further inspections all tax shelter adverts from second-rate website/companies will yield their financial lies. Arm yourself before doing 2008 taxes.
One particular website we analyzed advocated using universal life insurance as a tax shelter to ensure that neither during or after the investment would any tax be paid. It also mentioned the strategy of leveraging (more on that later) as a means of tax avoidance. The information on the website had enough factual errors to damage the credibility of the idea it was presenting. This site targeted Canadians and the most obvious mistake was on the homepage, a quote from ex-Finance Minister GARTH Turner. Now some of you know out there will know that JOHN not GARTH Turner was a Finance Minister. That’s like calling Alan Greenspan, oh I dunno, Charles Purplepants. This isn’t even a financially related mistake, not off to a good start I see. You can imagine how trustworthy their advice must be! For pete sake investors, do a two second Google search and discover how sheltered are your tax shelters.
Having spotted this error we wondered if this was how a bloodhound feels on the scent of a trail? As one poster commented when replying to the question on investing from a survey: “That’s what I have DiscussEconomics for.” Please know your questions are welcome, post them in the forum or send us an email (forum is better). Don’t get us wrong, if the investment or advice is good then we’ll aknowledge that. However there are many dubious and questionable investments both past and present. In fact there are enough around that the public rightly regards the financial field with suspicion and distrust. Yet ironically many of the investing public still gets burned by scams. Do any of these names sound familiar? Overseas Mutual Fund, Bre-X, The Principal Group, WorldCom, Visual Labs, Jerry White(UltimateWealth).
The promoters of these “investments” take advantage of these characteristics of human nature: fear, worry, greed, and impatience.
People don’t like to pay taxes. They worry they aren’t saving enough for their retirement if they are in their boomer years. They want to get out of debt tomorrow. They want to get a 25% guaranteed return in 6 months or sooner. Sometimes they believe that the only route to financial independence is to take a drastic detour down an unknown street. By the way I know that is none of you, but those people may be your friends.
Remember the word risk from a few issues ago? As you recall the term risk is often used when people really mean volatility. The true meaning of risk is the probability of the person being harmed when taking a certain action. Leveraging in investing is often risky. Leveraging involves borrowing money to invest. At the very latest repayment must occur after a return on investment has been made. In many cases the investment has not done well enough for the borrower to repay the loan. That is true risk, and any good financial planner would recommend leveraging in only a few situations. Yet clients have told me that they or people they know are still pressured to take on this risk. Enough of these cases have come to a bad conclusion that Canadian regulators are now scrutinizing leveraging with a high powered microscope. It is not fun to have to sell your house to repay a dot.bomb gone bad.
We cannot stress strongly enough that a financial plan takes time. Taking on more risk is not a substitute for time. What are some red flags that might point to the ‘danger zone’ in investing? The promoter tells you that many people have made a lot of money on the idea. I know a couple who lost every last dollar invested on an offshore scheme with that promise.
- The words guaranteed or secure especially if it is accompanied by a promise of a return of more than single digits.
- The words tax free, tax shelter, high returns, find out the secrets the general public doesn’t know.
- If the promoter is very persuasive and wants you to invest right away.
Remember how in Issue #2 (See Archive) about financial planning there was the analogy of a house for financial planning? Promoters of investing ideas always focus on the investing room as the answer to all of peoples’ financial wishes and woes. They ignore all the other rooms. Investments will not make up for careless spending, budgeting, or ballooning debt.
A related corollary is the popularity of legitimate investments in the stock market. Sometimes the publicity surrounding any particular investment will be the only reason people buy it. They don’t realize it consciously, but they figure it must be good if so many people are in it too. The media does not help either. An investment’s increased popularity will drive up the price. The increased demand will lead to a supply shortage pushing up the price even further. At prices in the hundreds of dollars per share investors should stop to ask: Is this investment worth $287/share? In hindsight the answer is almost always no. Think of Nortel Networks, Enron, etc.
Popularity in itself is not a good gauge of the worth of any investment. What goes up must almost always come down. Unlike the Drop of Fear at the Stampede the thrill is not in the descent. In a lot of cases the safest and most profitable action is to do the opposite of the fashion of the month.
[tags]tax shelters, personal tax, income tax, tax shelter[/tags]