New Exotic Investments Carry Huge Risks and Are Reminiscent of Past Mistakes

by Hank Coleman

We are all upset about the losses in our investment portfolio and retirement accounts. But, now is not the time to cut corners with exotic investments in order to try and make it all back in a short period of time. It is going to take a while for our investments to regain their losses, and that is okay. But, we need to realize that now and try to be patient with our investments. Dave Thomas, the founder of Wendy’s fast food restaurants, once quipped in his book, Dave’s Way, that the restaurant chain’s hamburgers were square instead of round because they do not cut corners. And, we should not cut corners with our investing either. Slow and steady will win the race.

Dave Thomas' Book - Daves WayWith so many people trying to squeeze out as much return as possible, investors are being swayed by scams and far too risky types of investments. Now, exotic investments like 2x or 3x leveraged funds are popping up that promise to double a stock index through massive borrowing. According to research conducted by TrimTabs Investment Research, leveraged Exchange Traded Funds (ETFs) betting on market gains lost 58% over the past year and those betting on a market decline only broke even. Absolute return funds that promise a certain percentage above the Treasury Bill rate of return have also been gaining in popularity recently. Market timing, commodities trading, foreign currency trading, peer to peer lending, and other fads have been coming into vogue during our recent recession. More and more investors are taking huge positions, as a percentage of their total investments, in extremely speculative and risky investments like gold, other precious metals, options, currency, and commodities. These are great supplemental investments but should be kept to a bare minimum in your portfolio.

These exotic investments sound alarmingly familiar to others of the past few years. How many of us remember such crazy ideas as credit default swaps, collateralized debt obligations (CDOs), reseve funds, auction rate securities, exchange traded notes, etc. And, we all know how those exotic investments have fared. Many were partially to blame for igniting our current market troubles.

While the S&P 500 index has been flat over the past decade, investors should remember that stocks have returned an annualized 8% over the past twenty years. Buy and hold investing is not dead. And, like Dave Thomas and Wendy’s, we could all benefit from not cutting corners.

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{ 1 comment }

Jermaine Holmes July 6, 2009 at 6:45 pm

READ MY WORDS: exotic investments are exotics scams! One Wells Fargo executive said it best–“Wall Street keeps on inventing newer ways to lose money when the traditional ways work just fine.” Stay traditional with investing. Stick to the basics, and you will do just fine. If you want to know more about fundamentals, read books recommended by Warren Buffet; one of them is by Benjamin Graham.

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