Category: Personal Finance

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Seven Investments That Can Ruin Your Life

scary-placesThe Wall Street Jungle, written by Richard Ney in 1970, compares the field of investments to a shadowy, sometimes impenetrable wilderness filled with dangerous beasts and hidden treasures. Blindly venturing into this unknown world can easily end in disaster.
 
Often, predators such as con men, thieves, and bandits lurk and set traps for overconfident, naive adventurers foolish enough to believe that a free lunch is possible. Inexperience can lead to a failure to recognize risk (or underestimate it) and result in poor decisions and financial loss.
 
However, overconfidence is more often the cause of investment catastrophes, especially when coupled with the innate tendency of people to follow the herd. In his 1871 book The Descent of Man, Charles Darwin writes, “Ignorance more frequently begets confidence than does knowledge.”
 
No investment is free of risk, but the following seven are particularly dangerous. If you want to protect your investments, read this guide carefully.

The Most Dangerous Investments

1. Penny Stocks

Common stocks trading for less than $5 per share are called “penny stocks” by the Security and Exchange Commission. Their stock prices are quoted on the “pink sheets,” an over-the-counter market that connects traders electronically. The companies are not required to register with the SEC and typically do not file periodic or annual reports with the Commission.
 
Penny stocks are the preferred vehicle for “pump and dump” schemes, fraudulently manipulating prices upward to sell owned shares with huge profits. Testifying before the House Subcommittee on Finance and Hazardous Materials, Committee on Commerce, SEC Director Richard H. Walker stated that organized crime families have been actively involved in manipulating penny stock since the 1970s. The New York Times reported activities of the New York and Russian mafias in two New York brokerage firms: White Rock Partners & Company and State Street Capital Markets Corporation.
 
Penny stocks attract gangsters and con men because they are easy to manipulate due to the lack of the following:
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Joining the Military After High School – Benefits and Risks

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Military service has long been a path for social and economic mobility – the gateway to the middle class – for thousands of young American men and women. Service is both a way to see the world and learn valuable skills that can be transferred into civilian life – and many enlistees would not have the opportunity to attend college or purchase a house without the benefits associated with military service. Furthermore, veterans who forego college are likely to earn higher pay than non-veterans who do the same. According to Jay Teachman, a sociology professor at Western Washington University, interviewed in The Fiscal Times, “Even if they [veterans] don’t earn more education, they certainly earn more money.”
 
The opportunity to learn responsibility, focus, and discipline from military service can benefit enlistees for life. People in the military are taught how to make decisions in extreme conditions and function in periods of stress – traits critical in civilian life. However, it is important to have a thorough understanding of the risks as well as the benefits of military service, and what the commitment to a career in the Armed Forces involves.

Military Experience and Success

Political Leaders

In addition to the financial benefits of military service, the training and experience it provides have enabled many to achieve high positions in politics and business. Since World War II, 10 of the United States’ 12 presidents have served in the country’s military. While the percentage of senators and representatives with military service has steadily declined since the 1970s, veterans continue to represent a significant portion of Congress. According to the Congressional Research Service, 73% in the 92nd Congress (1971 to 1972) had military experience, while 18.7% of the 114th Congress (2015 to 2016) were veterans.

Business Leaders

Executive offices of the country’s largest companies are full of military veterans. These include:

  • Frederick W. Smith: The founder and CEO of FedEx served with the Marines in two tours of duty in Vietnam.
  • Roger Staubach: Staubach, a former Heisman Trophy winner and founder of a national real estate firm, graduated from the U.S. Naval Academy and served two years in Vietnam.
  • Alex Gorsky: The chairman and CEO of Johnson & Johnson graduated from the U.S. Military Academy and served six years in the U.S. Army.

 
According to a 2012 report by the Center for New American Security, companies are likely to pay higher starting salaries for employees with military service. The reasons cited for the employers’ preference include:

  • Leadership and Teamwork Skills: Typically, veterans have led colleagues, accepted direction from others, and operated as part of a small team.
  • Character: Veterans are perceived as being trustworthy, dependable, and drug-free, and having a strong work ethic.
  • Structure and Discipline: Companies, especially those that emphasize safety, appreciate veterans’ experience following established procedures.
  • Expertise: Companies value veterans’ technical skills, job-specific experiences, and understanding of the military community.

Entrepreneurs

Veterans are responsible for a significant percentage of start-up and small businesses using the experience and education provided during their service. According to Marianne Hudson writing in Forbes, 30% of all American businesses are owned by veterans. As a consequence, the National Veteran-Owned Business Association proudly proclaims, “The lessons learned and lived in military service like leadership, teamwork, competitive spirit, mission-orientation, and ambition are the same attributes needed to succeed in business.”
 
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3 Risks of Investing in the Stock Market – Volatility, Timing & Overconfidence

dice invest-918x516Risk and reward are inextricably intertwined, and therefore, risk is inherent in all financial instruments. As a consequence, wise investors seek to minimize risk as much as possible without diluting the potential rewards. Warren Buffett, a recognized stock market investor, reportedly explained his investment philosophy to a group of Wharton Business School students in 2003: “I like to go for cinches. I like to shoot fish in a barrel. But I like to do it after the water has run out.”
 
Reducing all of the variables affecting a stock investment is difficult, especially the following hidden risks.

1. Volatility

Sometimes called “market risk” or “involuntary risk,” volatility refers to fluctuations in price of a security or portfolio over a year period. All securities are subject to market risks that include events beyond an investor’s control. These events affect the overall market, not just a single company or industry.
 
They include the following:
 
Geopolitical Events. World economies are connected in a global world, so a recession in China can have dire effects on the economy of the United States. The withdrawal of Great Britain from the European Union or a repudiation of NAFTA by a new U.S. Administration could ignite a trade war among countries with devastating effects on individual economies around the globe.
Economic Events. Monetary policies, unforeseen regulations or deregulation, tax revisions, changes in interest rates, or weather affect the gross domestic product (GDP) of countries, as well as the relations between countries. Businesses and industries are also affected.
Inflation. Also called “purchasing power risk,” the future value of assets or income may be reduced due to rising costs of goods and services or deliberate government action. Effectively, each unit of currency – $1 in the U.S. – buys less as time passes.
 
Volatility does not indicate the direction of a price move (up or down), just the range of price fluctuations over the period. It is expressed as “beta” and is intended to reflect the correlation between a security’s price and the market as a whole, usually the S&P 500:
 

  • A beta of 1 (low volatility) suggests a stock’s price will move in concert with the market. For example, if the S&P 500 moves 10%, the stock will move 10%.
  • Betas less than 1 (very low volatility) means that the security price fluctuates less than the market – a beta of 0.5 suggests that a 10% move in the market will produce only a 5% move in the security price.
  • A beta greater than 1 (high volatility) means the stock is more volatile than the market as a whole. Theoretically, a security with a beta of 1.3 would be 30% more volatile than the market.

 
According to Ted Noon, senior vice president of Acadian Asset Management, implementing low-volatility strategies – for example, choosing investments with low beta – can retain full exposure to equity markets while avoiding painful downside outcomes. However, Joseph Flaherty, chief investment-risk officer of MFS Investment Management, cautions that reducing risk is “less about concentrating on low volatility and more about avoiding high volatility.”

Strategies to Manage Volatility

Strategies to reduce the impact of volatility include:
 
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Everything You Wanted to Know About Preferred Stock

preferred-stock-business-918x516Once upon a time, preferred stocks were a popular investment with companies and investors. Combining elements of debt and equity, preferred stock was an ideal issue for businesses that lacked the physical assets to collateralize debt or could not attract common stock buyers.
 
In order to appeal to new investors, companies sweetened the pot by issuing a new security – preferred stock – that had less risk and a greater certainty of income than common stock. If a company falters and requires liquidation, the debt holders are paid in full first, followed by payment to the preferred stock holders in an amount equal to the liquidation value of the preferred stock (established at the time of the initial offering). Common stock shareholders then receive any cash remaining. Preferred shareholders receive full payment of their investment before common shareholders receive any payment. Similarly, preferred shareholders receive dividends before any common stock dividends are paid.
 
The first preferred stocks were issued by railroad companies and canals in the mid-1800s. Today, preferred stocks are more often issued by entrepreneurial startup companies, organizations in dire financial circumstances that are precluded from traditional debt and equity, or financial companies and utilities. In recent years, preferred stocks have fallen out of favor as investors have turned to common stocks or bonds – but there are a few notable exceptions.
 
Billionaire investor Warren Buffett is especially active in preferred stocks, usually in combination with attached stock warrants – a legal right to purchase common stock from the company for a defined price. In other words, a share of preferred stock might have a warrant giving the preferred shareholder the right to purchase a share of common stock for a fixed price for a specific term of time. In 2008, Buffett publicly invested $5 billion in a private Goldman Sachs preferred issue with a 10% dividend and warrants to buy $5 billion of stock at $115 per share (43.4 million shares). Other notable preferred stock purchases by Buffett include the holding company that owns H.J.Heinz, Bank of America, General Electric, and Burger King.
 
Investment grade preferred stocks with current yields between 5.2% and 6.5% have particular appeal to investors seeking high income, especially with current rates from high-quality bonds averaging yields between 1.7% and 3.0%. However, preferred stocks can be complicated, depending upon their composition, and are not for everyone.

Key Features of Preferred Stock

A Hybrid Security

Preferred stocks combine features of equity and debt:
 
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