Is it worth the wager? 7 risky investments that just aren’t worth the risk

Some investments are best left to the experts – and a few should be avoided by just about everyone...





risk is a very personal thing - some people are comfortable jumping out of planes, while others can hardly bear to ride in one; that’s why it’s such a complicated topic in investing. For every high-risk investment out there, there’ll be someone to stand up and say they made big money on it. But then, that’s their risk to take, and for savvy investors who can afford to lose now and then, it may be worth the wager.
By the same token, there are also some investments that are hardly ever worth the risk they entail...no matter who you are.
With that in mind, here are three risky investments that are best left to expert investors, and four that are rarely worth the risk for anyone (if you could even call them ‘investments’ at all)...

Three investments best left to the experts

1. Derivatives
   Famed investor Warren Buffett once referred to derivatives as financial “weapons of mass destruction.” To be fair, they have the ability to make investors very rich (and have done so), but Buffett wasn’t exaggerating about their destructive powers. That’s because derivative contracts - like options, futures, and forwards - can also create devastating losses. In some cases, it’s even possible to lose more than your initial investment! And that’s why these complicated instruments are best left to expert investors who can afford to stomach the loss.
2. Micro cap or penny stocks
   Penny stocks are shares in tiny start-up companies; they get their name because they often cost mere pennies per share. The allure of penny stocks stems from the fact that even the most successful companies start from humble beginnings. (We all love a Cinderella - or a Spanx! - story.) Indeed, investors are often lured by the hope that their little penny stock will become a big, multinational company.
   The reality is that when it comes to penny stocks, you often get what you pay for. In fact, you’ll be lucky if you come away with anything at all. Why are these stocks so risky? Unlike stocks in bigger, more reputable companies, penny stocks aren’t always traded on a regular exchange; many are traded on the over-the-counter bulletin board or pink sheets. This means they aren’t subject to the same reporting standards and minimum requirements as other stocks, which makes it next to impossible for investors to conduct proper due diligence. Plus, statistics say that 95 percent of start-ups fail within the first year. This makes your odds of picking the next big thing in a sea of penny stocks close to, well, zero.
3. Collectibles
   Collectible investments run the gamut from antique cars to wine and baseball cards. And while there are savvy collectors who make money off these passions, this is a very difficult game to win. After all, much of the value of these items is personal – people pay big money for them because they love, covet and collect them. What this means is that their value can be difficult to measure and is subject to trends. Furthermore, because collectibles tend to be physical items, investors often have to foot the bill for storing and insuring them. And you’d better really love every item you buy, because if you end up with a counterfeit, you’re stuck with it.

Four investments that aren’t worth the risk (or aren’t investments at all)

1. Savings accounts
   For those concerned about keeping their savings safe from the markets, this will come as a bit of a shock. That is, if you’re using a regular savings account, you’re taking a big risk. While you technically won’t lose any money in this way, it’s still a losing strategy if you can’t beat the rate of inflation. We say technically because if an investment isn’t beating inflation, you’re essentially losing a couple of percent per year just by holding it. Savings accounts are fine for meeting short-term savings goals, but when it comes to money you don’t plan to touch for years, it’s best to find something with a better rate of return.
2. Promises of a guaranteed return
   Yes, there are a few legitimate investments with returns that are virtually guaranteed, such as GICs, government bonds and savings accounts. But what you’ll notice about these investments is that the returns are generally low...often very low. So when you see an ad for an investment that returns a guaranteed 15 percent per year, you should be suspicious. Legitimate investments almost always have a risk of loss, and no advisor worth her salt would claim an investment is a sure thing. Bernie Madoff claimed that his fund produced returns of 10 to 12 percent every year - and we know how that turned out. His “fund” was really a Ponzi scheme, and one that cost some of his investors millions.
3. Timeshares
   Investments are designed to appreciate in value, generate income or both. A timeshare is unlikely to do either. Not only do these properties include a number of fees and expenses, but because there is so much competition in this market, they can be very difficult to sell. If you’re not convinced, consider the last time your financial advisor offered you a free weekend in Hawaii, just for giving this new mutual fund a try (riiight...). A timeshare is a vacation. If it’s the kind you’d like to take every year and it’s within your budget, go right ahead. Just don’t expect to make a profit.
4. Lottery tickets
   According to Statistics Canada, Canadian households spent nearly $500 per year on gambling activities in 2009, most of which went to lotteries and government lotteries. Yes, someone will win the lottery, but based on statistics, it very likely won’t be you. In fact, you have a better chance of being struck by lightning or acquiring flesh-eating disease. Why statisticians tend to choose such gruesome examples is unclear, but seriously, how many people do you know who’ve hit the jackpot on any of those? Oh, and if you simply saved that $500 per year over 40 years, you’d have $20,000 in the bank – and that’s without earning any interest. How’s that for a jackpot?

The bottom line on risk

There’s only one stunt man who has ever jumped out of a plane without a parachute (and survived) – and you can bet that he had a pretty good idea of what he was doing and how to navigate the risks. Investing is all about choosing risks that are reasonable to you - and doing everything you can to avoid taking a financial free fall.

From Goldengirlfinance.ca/ Posted by Mags