Hot Investment Concepts You Should Approach With Caution

Hot Investment Concepts You Should Approach With Caution

Nov. 6, 2013 2:09 p.m. ET

New investment products might seem like the best thing since the ETF, but following trends isn’t always the surest—or safest—way to make money. With this issue in mind, we posed the following question to The Experts: Are there any current hot investment concepts that you think investors should be wary of? This discussion relates to a recent Investing in Funds & ETFs Report and formed the basis of a discussion on The Experts blog on Nov. 4.

Beware of Alternative Investments

CHARLES ROTBLUT : The push for holding alternative investments concerns me. These are funds designed to produce a different return than stocks. Getting more diversification isn’t a bad idea in and of itself, but these funds tend to come with higher fees and many were created after the last bear market. They also are often complex with characteristics that aren’t easily understood. The age of these funds is also a concern. Since many of the funds now available to non-accredited individual investors (which are most of us) were created after the last bear market, we don’t know how they will hold up during a period of financial stress. If a bear market makes it difficult for these funds to execute their strategies or sell certain positions, the losses for shareholders could be significant.Plus, the need for these investments is open for argument. Many investors struggle to get the basic long-term mix of stocks, bonds and cash right. Merely adhering to this basic allocation over the long term is the single most important key to financial success. Alternative investments can supplement this strategy, but should be used only after an investor has shown the ability to stick with a basic allocation strategy through bull and bear markets.

Charles Rotblut (@charlesrotblut) is a vice president with the American Association of Individual Investors.

If an Investment Trend Is Hot, Stay Away!

SHERYL GARRETT : Be wary of anything hot! Investing should not be glamorous, or sexy, or hot. Sound investment principles haven’t changed in decades. The fact that two economists with very differing opinions about market efficiencies and opportunities were co-recipients of the Nobel Prize this year, makes it obvious that even the most educated and wise among us have differing opinions, and there is no clear and simple way to get rich fast. Any advertisement or conversation implying something different should be ignored.

Investing doesn’t have to be complicated and it doesn’t have to be expensive. There has been much more attention to costs related to investing and that alone is a relatively new concept to many people. Follow that hot trend!

Sheryl Garrett (@SherylGarrett) is founder of the Garrett Planning Network Inc.

Why You Should Invest in Companies That Promote Women

ELEANOR BLAYNEY : In my opinion, investors should be wary of most “hot” trends to avoid getting burned. “Hot” usually equates to hyped and in high demand, which also means higher prices to pay or higher risk to bear. A contrarian would argue that cold investment ideas produce the best results.

I’d like, however, to offer an investment idea whose time has come, though it is hardly hot. Rather than being wary, investors would do well to become aware of the now-proven fact that companies with higher representation of women on their corporate boards and at key executive levels outperform those with low female representation on a number of return measures (i.e., return on sales, return on equity, return on invested capital). In other words, firms that proactively support and advance women to leadership ranks aren’t only doing the “right thing” in terms of gender equality, they are doing right by their shareholders and stakeholders.

At CFP Board, where we have launched a Women’s Initiative to increase the number of female Certified Financial Planner professionals, we are following this research very closely as providing a compelling business reason for supporting the professional advancement and development of women leaders. Follow the money, and it could well lead you to women.

Eleanor Blayney (@EleanorBlayney) is consumer advocate of the Certified Financial Planner Board of Standards.

 

Market Timing: The Bad Idea That Just Won’t Go Away

MICHELLE PERRY HIGGINS : The hot investment concept that never dies and continues to rear its ugly head is the market timing strategy. There are some advisers who believe they can successfully time the peaks and valleys of the stock market and be successful. To this day, I have never crossed paths with anyone who can pull this off with enough accuracy to make it a feasible investment strategy.

Being correct only part of the time won’t work and the consequences of failure are too great, in my opinion. It is a strategy I would avoid at all costs for the typical individual investor.

Michelle Perry Higgins (@RetirementMPH) is a financial planner and principal at California Financial Advisors.

 

There Are No Guaranteed, Risk-Free Investments. Period.

GEORGE PAPADOPOULOS : Investors should always have their guards up to fight off the emotional impulses of greed and fear. Never forget that “what is too good to be true probably is.” If you hear “limited time opportunity” or “guaranteed” or “no risk,” don’t just walk away. Run!

Every week, I come across a crazy scheme or investment idea that makes me shake my head or cringe. Earlier this year, a client was invited to a dinner that turned out to be a pitch for a nontraded real-estate investment trust that ended up in legal trouble and whose initial costs would have covered my own fees for the next five years! These days, there are all kinds of pitches appealing to investors who are just tired of minimal returns on their cash. Of course, we now have the Bitcoin mania and I hear there may be an ETF invested in them. Recently, I heard that there will be an IPO of a company that sells you stakes in athletes’ future earnings. Just don’t bet it all on an NFL rookie running back.

Ignore what is hot; focus on what you can control and how much you save and invest. Reading John Bogle’s 10 rules of investing is highly recommended.

George Papadopoulos is a fee-only wealth manager in Novi, Mich., serving affluent individuals and families. You can follow him at twitter (@feeonlyplanner), connect with him at Google+ or visit his firm’s website.

A Balanced Portfolio May Be Boring, but It is Smart

LARRY ZIMPLEMAN : As a generic answer to this, I think investors should be wary of any investment idea that isn’t well diversified. I would also be wary of investment concepts that have meaningful levels of debt attached to them as a way to seek to enhance returns (since it also means that returns will be more volatile).

Despite how compelling some new investment idea might sound, the best option for long term investors remains to adopt and maintain a well-diversified portfolio.

Larry D. Zimpleman is chairman, president and chief executive of Principal Financial Group. PFG -2.06%

Today’s Hot Idea: Commit to Saving More Tomorrow

TERRANCE ODEAN : I don’t believe in buying hot investments. However, a hot investment concept is to precommit to a higher savings rate sometime in the future. Behavioral economists Richard Thaler and Shlomo Benartzi call this “Save More Tomorrow.” Some 401(k) plans are implementing this concept.

Terrance Odean is the Rudd Family Foundation professor and chair of the finance group at the Haas School of Business at the University of California, Berkeley.

Alternative Investments May Be in for Some (Not-So-Good) Surprises

TOM BRAKKE : So-called alternatives are being marketed aggressively right now and the term is applied to a broad array of vehicles and strategies. Many of them have relatively short performance histories but are favored because they are thought to be relatively uncorrelated with stocks and bonds. However, there are probably some real surprises ahead in how they actually perform.

Another thing to keep in mind: They have higher fees than most other investment products. While many think that when buying packaged investment products “you get what you pay for,” the evidence is that by paying more in investment fees, you don’t get better after-fee performance.

Tom Brakke (@researchpuzzler) is a consultant, writer and investment adviser who specializes in the analysis of investment decision making and the communication of investment ideas.