Many ‘Safe’ Investments Aren’t So Safe


Wall Street is adept at adjusting its marketing to the times and is never at a loss to pitch products, including those designed to play on investor fears. After all, that is what securities salespeople do. Many investments that Wall Street is currently calling “safe”, however, are actually both too risky and too costly, as Penelope Wang pointed out in her CNNMoney blog, “‘Safe’ Investments that are actually risky.”

The truth of the matter is there are no safe havens in the investment world, and investors should be skeptical (to say the least) of any claims to the contrary. Financial advisers need to understand the risks and make certain that the risks are consistent with the investor’s investment objectives and risk tolerance and are disclosed to the investor. That is easier said than done, and it is not simply a matter of checking off a few boxes of multiple choice questions and answers.

Risky products being pitched as “safe” have names like bear market funds, long-short funds, absolute return funds, high-yielding dividend stocks (“Dogs of the Dow,” et cetera). First and foremost, many of them are alternative investments that cannot seriously be considered as safe. Bear market funds, for example, engage in short selling ? a high-risk, speculative investment strategy that applies leverage to bets that a stock or basket of stocks will decline in the short term. No one has a reasonable basis for predicting short term price movements, because they are the result of complexity so great as to be essentially random.

A variation on that theme, long-short funds, involves a combination of options, short-selling and derivatives trading that is impossible for most people to understand, much less predict outcomes. Such funds are also inordinately costly with fees off the top as high as two percent.

Investing in the Dogs of the Dow, or the highest-yielding stocks is not necessarily a bad strategy, but stocks are far riskier than bonds, and the highest-yielding stocks are generally companies with problems ? the yield is comparatively high not because the company’s dividend is comparatively high but rather because the stock price has declined. As the article notes, the S&P 500 stock index declined 37 percent in 2008, while the average taxable bond fund declined 5 percent.

Index annuities are hybrid investment and insurance policies. They are highly complex. They are designed by actuaries using mathematical and statistical models that few people understand. It is true that index annuities provide some upside potential with principal protection, but the upside is limited and the protection is, by most accounts, overly costly. In addition, investors who cash out or “surrender” their policies in the first ten years or so face steep surrender charges, a fact that is often unexplained or downplayed by sellers.

Page Perry is an Atlanta-based law firm with over 170 years of collective experience maintaining integrity in the investment markets and protecting investor rights.