There's a sucker born in every minute of a bear market, and there's always someone willing to take advantage.
The same sorts of folks who were peddling dot-coms at the peak in 1999 and mortgage-backed securities in 2006 are back with a new set of "hot opportunities." That's Wall Street-speak for "junk we're pushing now."
Among the hot areas for sale now are gold, so-called life settlements and equity-indexed annuities, often pitched as a safe way to get market returns without market risks. There are also companies touting vague "safe alternative investments" yielding consistent 10% returns.
It's not always easy to know when to run for cover. Advertisements may not tell you upfront what product is being sold. And we're not talking just about outright scams like the one Bernard Madoff allegedly ran. Some of the stuff for sale has some real value; it may just be wrong for you, wrong for right now or not anywhere near as good as advertised.
Here's a rundown on these four areas, with details that can clue you into trouble -- in case someone tries to peddle these or some new brand of debris to you.
Cold, hard gold
"This is an environment where you should be concerned about preserving your wealth," declares James DiGeorgia, the editor of the Gold & Energy Advisor. "I recommend that people put 15% of their wealth in physical gold -- the commodity to hold."DiGeorgia sells gold, so he has a vested interest in touting its virtues. He's also a true believer, like the many so-called gold bugs.
And his recommendation would be brilliant if it were 2001. Over the past eight years, gold has soared from about $271 an ounce to its recent closing price above $900, an all-time high. If you had bought then and sold today, you would have earned a 230% return -- better than virtually any other investment.
But this is 2009. Today, you'd be buying gold at a historically high price, a dicey proposition. Over the long term, gold has been one of the world's worst buys.
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Here's why:
Price history: When gold bullion was first available for public purchase in the U.S -- a few years after the nation went off the gold standard in 1971 -- it had a similar run-up in value, from about $200 an ounce to its 1980 high of $850. Over the next 21 years, the price slid right back to where it had started.
You would have been rich if you had bought at the nadir and sold at the peak. But those without psychic powers who bought and held for the long term likely earned little, if any, appreciation.
Now adjust for inflation: If you bought gold in 1979 at the relatively low price of $450 an ounce, you'd need to sell it for more than $1,000 today just to break even.
Trading costs: Trading physical gold can cost from 4% to 18%, depending on the size of the order, DiGeorgia said. The U.S. Treasury sells its gold eagle coins at a 3% to 12% premium over the metal, he said. Brokers add 4% to 6% more. So if the spot price was $500 per ounce and you were buying at least an ounce, you'd likely pay about $550 an ounce. You'd then need a 10% return just to break even.
Storage: Unless buyers have a home safe, they're going to need a safe-deposit box. Renting the smallest box from a Wells Fargo branch will cost about $40 a year, bank spokeswoman Mary Trigg said.
DiGeorgia considers these concerns insignificant because he thinks the U.S. monetary system is in the early stages of collapse. Paper money will become worthless, he posits, and gold will regain its ancient role as the currency of choice.
Just one problem, though: If things get so bad that paper money means nothing, why would gold be valuable? Unlike other commodities -- oil, pork bellies, corn -- you can't eat it or use it for fuel. If you're convinced that the system will collapse, it might be smarter to stock up on canned goods.
Death futures
Here's a deal for you: Invest $20,000 today and get $40,000 in five to seven years.The catch: Your return hinges on when a stranger dies.
So-called life settlements are the latest twist in a 30-year-old market in "death futures." They involve buying a person's life insurance policy for a fraction of the policy's face value. The investor gets paid when the policyholder dies.
These trades used to be done solely between investors and terminally ill AIDS patients. But the market moved on to cancer patients, and now you can buy the life insurance policies of otherwise healthy old people. (They'll die eventually, right?)
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Bogus real-estate dealsSince the real-estate bubble burst, scam artists have been coming up with hard-to-resist deals. Be sure to investigate before you invest.
The risks:
Trading costs: Policies are priced based on life expectancies, insurance company ratings and various policy details. That analysis is costly and makes the fees paid to go-betweens steep, said Stuart Hersch, the president of Cantor LifeMarkets in New York, which trades in death futures.
Fees currently amount to about 30% of the transaction amount.
Fraud: The market used to be dominated by shady characters involved in myriad frauds, such as fabricating policies and policyholders. While there are more legitimate players today, Hersch acknowledges that some crooks remain.
Longevity: Then there's Gertrude Baines, who, at 114, is currently the world's oldest person. As far as we know, she hasn't peddled a life insurance policy, but who's to say that the next supercentenarian (as demographers like to label those 110 or older) won't? Many insurers pay death benefits at age 100, even if you're still alive. But the policy was likely priced assuming that the holder would kick off in his or her 80s.
Moreover, the investor needs to keep the policy in force by paying annual premiums. So every year your policyholder stays happy and healthy diminishes your return.
Continued: Equity-indexed annuities
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