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Five Risky Investments—and Alternatives to Them

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Five Risky Investments—and Alternatives to Them

You should always aim to create a high-performing investment portfolio. However, you should ensure that the investments you make are not unnecessarily risky. You are probably not in a position to take a serious hit, so it is vital that you know exactly how much exposure you have in each of the funds you’re in.

Relying on your stock broker to tell you of exceptionally risky investments will not always do. Last week I wrote an article in which I pointed out the fact that brokers are out to make money themselves and will attempt to sell you products that they think you’ll go for, regardless of whether it’s good for you. This article is a kind of follow up to that piece.

Here are some of the 5 most dangerous investments for individuals:

  • Liquid Alternative Funds
  • Nontraded Real-Estate Investment Trusts
  • Leveraged and Inverse Exchange-Traded Funds
  • Structured Notes
  • Unconstrained Bond Funds

The Wall Street Journal presents a set of excellent analyses on why these investments are dangerous and gives readers alternatives to them. A short excerpt from the section on Nontraded Real-Estate Investment will provide you an example of the great insight to be found in this article:

Nontraded real-estate investment trusts are similar to their public counterparts, which trade like stocks and allow investors to invest in an array of commercial properties.

Investors are attracted to them because of their high dividends—generally as much as 7% on invested capital versus 3% to 4% for publicly traded REITs, according to Green Street Advisors, a research firm in Newport Beach, Calif.

But nontraded REITs can be hard for investors to unload during a real-estate downturn, advisers say. The investments have become a concern of the Financial Industry Regulatory Authority, the industry’s self-regulator. Because they are generally illiquid, their performance and value are difficult to understand and the cost is high, the agency has warned.

Try instead: Publicly traded REITs aren’t nearly as risky and are far more transparent, and they can be a good diversifier in a portfolio, experts say. A mutual fund that holds a basket of commercial real-estate companies also can provide exposure to the market and is liquid, says Dave Homan of Willow Creek Wealth Management in Sebastopol, Calif.

The rest of the piece can be read here. It offers very sound advice on which investments to avoid and, as a sort of bonus, gives you concrete guidance on funds that are similar but much less hazardous.

You should check with your broker to see if any of your money is tied up in any of these kinds of funds. Even if you’re not too bothered by high risk investment, it is still important to understand the conditions under which such funds operate. This will allow you to set adequate limits on the amount of money you’re actually putting into them. Doing so does not amount to shirking from opportunity; it instead allows you to take risks in a more informed and rational way.

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About Christopher Reid Chris was born in Washington, D.C. and lives in Britain. He works as a blogger, essayist, and novelist. His first book, Tea with Maureen, has just been published.

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