Alert
Close

Watch the NASCAR race on Sunday at the Atlanta Motor Speedway. Join the Drive to End Hunger!

AARP The Magazine

Bad Money Moves

Use caution before making any investments in these services and financial products

Don’t Fall for These Investments

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.

Red Granite Pictures

Alternative Investments: The Pitch

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.

Istock

What You Need to Know

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.

Istock

Time-Share: The Pitch

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?

Istock

What You Need to Know

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.

Istock

Private and Non-Traded REITs: The Pitch

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.

Istock

What You Need to Know

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.

Istock

Oil Drilling Partnership: The Pitch

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."

Istock

What You Need to Know

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.

Istock

Warning Signs

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

Istock

An Impossible Promise

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.

Istock

Complex Terms

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.

Istock

A Ticking Clock

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.

Istock

Fancy Language

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.

AARP

A Stranger Calls

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.

Istock

  • Pinterest
  • Google+

More Articles & Slideshows

ways to save money shopping lawn home care dishes spa services credit cards cheap eats hobbies gas fuel bills finances home repair (Chris Gash)

99 Ways to Save Money
Tips and tricks to saving money on travel, health care, food and more

famous celebrities save coupon clip frugal life savings yeager cheap rich famous dollar stretch

Frugal Celebrities
You’ll be surprised how these wealthy celebrities stretch their dollars

 

Topic Alerts

You can get weekly email alerts on the topics below. Just click “Follow.”

Manage Alerts

Processing

Please wait...

progress bar, please wait

Tell Us WhatYou Think

Please leave your comment below.

Money Blog

Discounts & Benefits

From companies that meet the high standards of service and quality set by AARP.

Life insurance: you are covered rain or shine

Exclusive annuities for members from AARP Lifetime Income Program from New York Life.

AARP Credit card from Chase

Members can get cash back rewards on purchases with the AARP® Credit Card from Chase.

Homeowners Insurance
Member Benefits

Join or renew today! AARP members receive exclusive member benefits & affect social change.