Fans of this column typically have two fears. Their first worry is that something in their portfolio will show up here, singled out as a...
Fans of this column typically have two fears. Their first worry is that something in their portfolio will show up here, singled out as a poor choice. Then, they fear that the stuff they hold in their portfolio or are considering for their next investment qualifies as a stupid investment, but simply hasn’t been singled out in print yet.
For proof, here are some recent questions from readers whose concerns fall into that second category, covering investment types that deserve attention, even if they haven’t been the focus of Stupid Investment of the Week.
Typically, Stupid Investment of the Week focuses in on securities that are less-than-ideal for the average consumer, in the hope that spotlighting troubling traits and characteristics in one case will help investors avoid problems elsewhere.
Question: I read about the Vanguard Managed Payout funds, and it sounds like a gimmick to me. Maybe it’s something for Stupid Investment of the Week? Or am I missing something? — From Myron in West Palm Beach, Fla.
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Answer: Gimmick was precisely what I thought when I first learned that Vanguard, Fidelity and several other fund firms were rolling out funds that are more about “decumulation” than accumulation. The more I have looked, however, the less gimmicky they seem; they don’t look like stupid investments to me.
Payout funds are built to provide monthly income, but they are not annuities; there’s no lockup, few of the custom features — like guaranteed minimum withdrawals — and none of the tax advantages sometimes associated with insurance-oriented products. That also means that these funds are cheaper than annuities, which is why some people are looking at them as a possible alternative.
The idea, here, is to fund a personal endowment, where an investor uses multiple funds — typically, a managed payout fund is a fund-of-funds — and strategies to build and protect a nest egg that throws off regular income. There are different models; Vanguard’s funds make scheduled, varying distributions from income and growth and try to leave principal untouched indefinitely, while Fidelity’s versions will dip into principal and make withdrawals up to a preset liquidation date.
On the surface, the concept is sound. Consumers need to be as concerned with making their money last a lifetime as they are in gathering assets in the first place. An entire host of new financial products is being created to serve these needs.
That said, it’s a bit early to sort out the potential pitfalls of the various strategies, and to know which methodologies will work. Every major fund company is looking at this space; several are planning products that are distinctly different from the first generation of managed payout funds.
That doesn’t mean they will be better, but it does mean consumers will have more options and can wait to see how other firms address this issue. As such, investors should look at these issues with a skeptic’s eye and a willingness to wait and see if the strategy works in practice, and not just in the fund company’s developmental phases.
Question: A family friend who is in the mortgage business told me about something called a “trust deed.” It pays really great interest, like 12%, but I can’t tell if it’s a stupid investment or not. Before I fall for something, I wanted your opinion. — Peter in Modesto, Calif.
Answer: Trust-deed sales effectively make you — or you and a group of others — the banker in someone else’s property deal. The trust deed itself is the document that a land owner provides as security for financing; effectively, you are getting a promissory note, where your loan is secured by the property.
Payouts on trust deed deals frequently run in the 10% to 13% range.
For an average investor, trust deeds have a lot of risk. That said, they have yet to be featured as a “stupid investment,” because I haven’t seen a lot of trust-deed failures, despite sales-practice concerns that prompted the California Department of Real Estate to issue a “What You Should Know” brochure in 2007.
What is clear is that trust-deed investing is tricky stuff, even before factoring in the current credit crunch and real estate meltdown. Put your money into the wrong deal and you’re looking at the kind of failure that has driven some banks to the brink, having an ownership stake in a property that is losing value and that you have to take back from the borrower through foreclosure.
You don’t have a bank’s deep pockets or ability to withstand losses.
What’s clear about trust-deed investing is that there’s a lot to know in order to get comfortable with it, starting with the experience and integrity of the loan broker but extending to what happens if the deal goes sour. Because of the dollars involved, this typically isn’t something the average investor considers, but if you’re starting at the point of “something called a trust deed,” it’s clear you don’t know enough to make it a smart investment for you.
Q: I have been looking at “high-yield investment programs” online. Mostly, they seem to be scams, but there are some that apparently pay, at least for a while. Is there a way to tell which ones are OK?
— Rob in Seattle
A: HYIPs, as they are known, promise outrageous yields in the range of 2 percent per day. It would take your typical interest-bearing checking account more than a year to generate that kind of return, which is precisely why some people want to take a chance.
They have been featured as Stupid Investment of the Week (Oct. 1, 2004), because they sound too good to be true and typically are. Most of these are Ponzi schemes, where even a “successful investor” is throwing in a small amount and hoping they will get returns from a greater pack of fools until the plan crumbles under its own weight. That usually doesn’t take too long, days or weeks at most.
Somebody is making money off this stuff, but it’s almost certainly the guys behind the deals who are thrilled that you would consider being their “greater fool.” From all of the HYIP programs I have looked at, I’d say they rank on the order of lottery tickets in terms of their real investment value.
Chuck Jaffe is senior columnist for MarketWatch. He does not own or hold short positions in any securities covered by Stupid Investment of the Week. If you have a suggestion for Chuck Jaffe’s Stupid Investment of the Week or a comment about this week’s column, you can reach him at firstname.lastname@example.org or Box 70, Cohasset, MA 02025-0070.