5 worst investment ideas of the year

By Tim Middleton

This has been a year of bad ideas. Mel Gibson or O.J. Simpson, anyone?

For investors it's been a surprisingly good year, but we've had our share of boneheaded notions. Could I interest you in mutual fund 2.5, which promises to deliver more than twice the zip of the market, but less than three times? Or how about mutual fund 0.0, a new regulatory scheme in which no mutual funds whatsoever could exist?

These and plenty of other crackpot ideas were run up the flagpole in 2006. Here is my salute to the worst five of them:

1. CurrencyShares Swedish Krona Trust

Sweden is a rocky semi-Arctic country about the size of California but with a population, 9 million, only about equal to Los Angeles. Its gross domestic product last year was about $350 billion, as measured in U.S. dollars. (California's was nearly five times as much.) In Swedish currency terms, it was about 1.868 trillion krona.

Why the Swedes held onto their own currency rather than adopt the euro, as most other European Union members have, is their business. The British held onto the pound sterling. Maybe it's just national pride.

But why in the world would Americans invest in CurrencyShares Swedish Krona Trust (FXS, news, msgs), an exchange-traded fund (ETF) that represents the Swedish krona? To hedge buying a Volvo next summer? The United States is the top purchaser of Sweden's exports, accounting for 10.6% of them, but Sweden doesn't import much of anything from here. Sweden is not, outside of autos and aircraft engines, of much economic interest to anybody.

CurrencyShares, on the other hand, is a new marketing scheme by Rydex Investments to install a few more slot machines in the market casino. CurrencyShares is a group of seven ETFs, most of which represent fairly sensible currency opportunities, like the euro and the pound sterling.

But the krona? Why not the Thai bhat? Or the Myanmar kyat?

"I have a client that has been trying, unsuccessfully, to get me to invest in Iraqi dinars," says Thom K. Hall, a partner in Financial Strategies Institute in Midvale, Utah. Iraq is much more politically volatile than Sweden, and therefore an even better place to speculate in currencies. But as an investment? Don't be silly.

2. Direxion 2.5 mutual funds

Rydex is hardly the only mutual fund company to introduce mutual funds whose raison d'etre is mere marketing mischief. Direxion Funds, which used to be called the Potomac family of funds, has come out in recent months with a couple of dozen leveraged bull and bear portfolios. What sets them apart from Rydex's leveraged portfolios, as well as those of ProFunds, is that they are not leveraged two times; they are leveraged 2½ times.

"These are not for individual investors. They are for financial advisers using sophisticated strategies, including market-timing strategies," says a spokeswoman for Direxion.

How 2.5 is more sophisticated than 2.0, she didn't say. What could she say? The buzzword here is "sophisticated." The very definition of eligibility to buy into a hedge fund is that you fit the Securities and Exchange Commission's definition of "sophisticated." It's what we all aspire to. In fact, these funds are aimed directly at the most gullible individual investors. The minimum investment in Direxion Nasdaq 100 Bull 2.5 Fund (DXQLX) is $10,000, about a hundredth what you need to have on hand to invest in a hedge fund.

"I can't conceive that there's any reputable financial adviser interested in a 2½-to-1 leveraged ETF," says Roy Weitz, publisher of FundAlarm.com, a Web site that lampoons the industry's stupidest ideas.

And why 2.5? "Maybe that's the most they can figure out how to do," Weitz jokes. Actually, he sees this as simple marketing inflation. "My guess is it's just going to up the ante for everybody else. They'll come up with 3-to-1, or 4, or 5. It seems to me like gambling."

3. Off with the board's head

In January, a conference was held to promote the idea of eliminating mutual fund boards of directors. Sponsored mainly by libertarian, free-market groups like the American Enterprise Institute for Public Policy Research, as well as lame duck Sen. Rick Santorum, R-Pa., the idea is that fund boards have done a lousy job with their principal task, which is holding down fees.

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