Bad Money Moves

En español | Watching Leonardo DiCaprio in The Wolf of Wall Street, it’s easy to think we'd never fall for the cold-call pitches his character uses to lure unwary investors. Sadly, for too many of us, that’s not the case. Read on for four glaring examples of unwise investments, plus five warning signs.

Here’s the pitch on these products: “Investing in the stock market is risky. You want some investments that zig when the stock market zags.” Examples include long/short equity funds, market-neutral funds, managed-futures funds, nontraditional bond funds, foreign-currency funds and bear market funds. Many are private investments telemarketed from call centers (always a warning sign); others have gone mainstream and are offered through mutual funds sold by brokerage houses and investment advisers.

Often alternative investments do indeed deliver performance unrelated to the overall market. Unfortunately, that performance is typically terrible. Morningstar recently reported that the average five-year performance of alternative mutual funds was to lose 2 percent annually. Many of these funds have zero expected return before costs.

Have you ever been offered a stay at a resort at an incredible price? And all you had to do was spend 90 minutes in a presentation on the resort’s interval-ownership program? It goes something like this: You watch a promotional video, tour the property, then they tell you that for, say, $20,000, you can invest in a lifetime of weeklong vacations. How can you resist?

Let’s first do a little math. Your $20,000 translates to more than $1 million per unit if all 52 weeks are sold. But the unit itself may be worth only $200,000. And it’s a money pit of recurring fees — in 2012 average annual maintenance costs hit $822. The vast majority of time-share owners can’t unload their units for anything approaching what they paid. If you go to SellMyTimeshareNow.com, you’ll find more than a thousand time-shares for $1,000 or less. These owners are just looking to get out of the maintenance obligations they purchased. Bottom line: Get a hotel room.

Advisers often pitch private real estate investment trusts as a safe way to get great yields without the volatility of publicly traded REITs. About 90 non-traded REITs raised $73 billion in the last decade, mostly from individual investors. These REITs then buy income-producing real estate.

Over the past several years, the largest five raised $26 billion by promising a yield averaging 6.4 percent annually, according to MTS Research Advisors. All but one later lowered their dividends and the estimated value of their share price. By comparison, public REITs (which are sold easily and don’t pay commissions) are up 130 percent over the past five years.

I often get calls from strangers that go something like this: “Hi, I’m Brandon Smith from Petrolox Energy Resources Co. here in Dallas. We are an oil and gas drilling company with a 10-year track record. Our typical partnership produces a 20 to 30 percent annual cash return that will last for 30 years. That means if you invest $100,000, you can expect $20,000 to $30,000 a year for the rest of your life."

Some of these calls are outright scams. But most are legitimate oil companies with real drilling operations. But think: If this company has been producing 20 percent annual returns, their current investors would be clamoring to put money into new partnerships. They wouldn’t need to pay telemarketers to cold-call. The U.S. Security and Exchange Commission (SEC) recommends doing due diligence. It’s faster to just hang up.

When you are making decisions on financial investments, these five cues will tell you when something may not be quite right.

There’s no such thing as high returns with little or no risk. The best opportunities typically go to institutional investors: It’s much easier to raise money from a few big fish than to solicit thousands of small fry.

Perhaps the offer comes with hundreds of pages of technical and legal disclosure, and you’re required to sign a document saying you read and understood it all. Good investments are easy to grasp. My rule is never to buy anything I couldn’t explain to an 8-year-old.

If you hear that this investment opportunity is available only for a short time, it’s the reddest of flags. The salesperson doesn’t want you to think it over or ask others for their opinion.

That would be words such as “structured,” “managed,” “deferred,” “derivative,” “collateralized” and even “guaranteed.” Of course, there is nothing wrong with a Federal Deposit Insurance Corporation (FDIC) guarantee on your CD. But leaving cash at a bank or brokerage firm is a bad investment if you are earning 0.1 percent or less: You’re losing ground to inflation. A higher-paying CD is a better option.

Be very careful of accepting a free-lunch “educational seminar.” I have yet to meet someone unknown to me who truly wanted to make me rich.

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