Chasing Yield - A Cautionary Tale

[imoldernu]

http://www.nytimes.com/2013/02/11/bu...nt-savers.html

My guess would be that almost no one on these pages will be affected by the risky investments detailed in this NYT article, but think it could be a reminder that shortcuts to high yields are leading more investors to take chances.

One of the more interesting comments was this, where the promised rate of return appeared to be more in line with low risk instruments.

Quote:

Mary Beck, a furniture business consultant in Pasadena, Calif., said that in 2008, as the stock investments in her husband’s I.R.A. began to fall quickly, the couple moved $470,000 to a new product recommended by their broker. While the offering was unfamiliar — part ownership in a fleet of luxury cars — Ms. Beck bought the pitch because her broker had been around for years, and the product offered what seemed to be a modest annual interest rate of 7 percent. “We knew that 12 percent wasn’t realistic, but 7 percent seemed realistic,” Ms. Beck said. “To us, it was a very conservative way to ensure that we’d increase our savings.” Soon after they stopped receiving interest payments, the Becks lost their money when the venture went bankrupt in 2012. Ms. Beck and her husband have been reconfiguring their retirement and are planning to work longer.

A second concern is the rate of increase in the number of riskier products, many of which are finding their way into baskets of funds...

Quote:

The money that retail investors have in alternative investments in the United States, ranging from baskets of commodities to mutual funds that employ sophisticated trading, more than doubled from 2008 to 2012, to $712 billion from $312 billion, according to McKinsey & Company. Many of the products hold out the promise of higher returns while ostensibly being immune to the volatility of stock markets.

[haha]

Quote:

Originally Posted by imoldernu http://www.nytimes.com/2013/02/11/bu...nt-savers.html My guess would be that almost no one on these pages will be affected by the risky investments detailed in this NYT article, but think it could be a reminder that shortcuts to high yields are leading more investors to take chances.

Good article. A fleet of luxury cars, now what could go wrong with that?

There is mention of one alternate investment that gets a flurry of interest here from time to time, usually when markets are falling. Non-publicly traded REITs. These things always have passionate defenders, for reasons that seemed to me to come down to "I don't want to know the bad news."

Quote:

The outstanding amount of such nontraded REITs grew to $65 billion last year, from $43 billion in 2009, according to Direct Investments Spectrum. The private nature of these investments has been advertised as a good thing, because it means they are less likely to move up and down with the stock market. But it has also made it hard for investors to value their holdings or to get out when they need the money.

Ha

[Texas Proud]

Putting $470K into cars seems like a losing proposition.... they decline in value...

Also, it does not seem that they were diversified... that investment should not have been more than 5% of their portfolio.... they could have survived the loss if they had done just this one thing...

[Animorph]

We had a bank ad in the paper today offering "IRA and 401k Special 6.5% APR* Guaranteed for Income", "Principal & Interest are Totally Secure!". The really small fine print is that it is an annuity and subject to insurance company health, of course. Seems more like the principal is totally gone. At least it is, probably, a legit product, even if the ad is pretty slimey.

[texasdiver]

How does one put $470 grand of IRA money into a luxury car business? Do they cash out the IRA, pay the taxes and penalty and invest the rest? Or is someone providing an IRA umbrella around these types of investments?

And her broker recommended it? Sheesh.

[sheehs1]

Quote:

Originally Posted by texasdiver How does one put $470 grand of IRA money into a luxury car business? Do they cash out the IRA, pay the taxes and penalty and invest the rest? Or is someone providing an IRA umbrella around these types of investments? And her broker recommended it? Sheesh.

I'm amazed they thought it would be safe! I don't know anyone who would do this. Private deals can go belly up in a heart beat.

[jclarksnakes]

A fleet of LUXURY cars? In their small minds that probably made it a MUCH safer investment than a fleet of ordinary cars.

[traineeinvestor]

Quote:

Originally Posted by Texas Proud Also, it does not seem that they were diversified... that investment should not have been more than 5% of their portfolio.... they could have survived the loss if they had done just this one thing...

+1

Putting some money into risky investments is one thing. Putting a substantial part of your assets into a single risky investment is something else entirely. The fact that it [was done][may have been done] off the back of professional advice is pretty scary.

[UserRequested]

One thing's for sure. Those cars can really go fast

470 to zero in less than 5 seconds