Beware of These 10 Scary Investments

Do you want to see a financial advisor jump?

Bring up one of these frightening investments. These ideas give financial advisors goose bumps because they’re like Halloween candy: seemingly free, hard to resist, and in this case, likely to deliver financial cavities.

1. Investments bought through credit cards. Using a credit card to buy stock or other investments is essentially creating your own high-risk margin, says Donna Skeels Cygan, a certified financial planner and author of “The Joy of Financial Security: The Art and Science of Becoming Happier, Managing Your Money Wisely, and Creating a Secure Financial Future.”

It’s tempting to use a card that offers an introductory interest rate of zero to indulge in an individual stock, a mutual fund or commodity that looks like a great deal. You would let the investment regain value, then sell it, pay off the card before interest kicks in and keep the difference.
What could go wrong? Cygan counts the ways: The investment continues to lose value and you owe more than it’s worth. Then you’re stuck paying off the card with interest, and in the process, you ding your credit rating. Just don’t do it.

2. Marijuana companies. The bad idea du jour is investing in medical marijuana companies, says Linda Williams, professor of business administration at Tidewater Community College. “One person told me it’s like getting in on the ground floor of R.J. Reynolds,” she says.

Vending machines for marijuana, farms and distribution centers are all sprouting opportunities that will snuff out investors’ money, Williams says. “This is a generation that has grown up without marijuana having a stigma, so kids think it’s a legitimate investment vehicle,” she says. “But medical marijuana is scary because the regulations are still forming. The market could go up in smoke with one lawsuit for wrongful death by someone with [marijuana] in their system.”

3. Venture funds, commodities and other complicated investments. Don’t confuse the Securities and Exchange Commission reports and public listing status as a seal of approval for the company, Williams adds. “Do your due diligence. And if you don’t understand what the company does, don’t buy the stock,” she says.

4. Thinly disguised pyramid schemes. Online social networks have put multilevel marketing schemes on steroids, Williams says. She recently received an email from a student asking her opinion of World Ventures, which describes itself as a “home-based direct selling travel club,” but Williams describes it as a pyramid scheme. In fact, the Better Business Bureau has put an alert on World Ventures.

5. Peer lending and fundraising networks. These networks have lowered some people’s skepticism, Williams notes. To compound the problem, the steady drumbeat of news about college dropouts who sold half-baked ideas to huge tech companies has made many young people susceptible to “once in a lifetime” offers pitched by scam artists, Williams says.

“I had one student who paid $5,000 for a freestanding breathalyzer to put in a bar. The idea was that people would pay $1 to blow into it to see if they were too drunk to drive. But the money was gone,” Williams says.

Another controversial outfit is LendingClub.com, a peer-lending company that purports to deliver high returns if you invest in loans to average Joes and Janes, but which is operating in a regulatory gray area, to put it kindly.

6. Your home. Deluding yourself that your primary residence is a great investment is a ghastly idea, Cygan says. She once had an empty-nester client move to a bigger house for retirement, with all the attendant debt. “Now, all their income and financial projections don’t work,” she says. “This house is eating them alive.”

7. Your employer. Don’t own too much stock in the company you work for, says David Gilg, adjunct instructor in business management at Columbus State Community College and a self-employed retirement advisor. Some people think they are signaling their loyalty to the company by keeping every share they are given, he says, but that just puts the entire portfolio at risk. It’s easy to lose track of shares funneled into your 401(k) plan, but take the time to rebalance that portfolio, he advises.

8. Friends’ employers. Don’t put much stock in supposedly “insider” information shared by friends about their employers, Gilg says. He is also skeptical when students or clients take recommendations from friends whose jobs involve limited insight into financial functions, such as checking credit reports at an auto dealership. It’s not smart, Gilg says, to put money where other people’s mouths are.

9. Highly volatile investments. What’s truly frightening is the prospect of not being able to get back the money you put into an investment, Williams says. If you’re tempted to invest, find out how you’d pull back the funds if you had an emergency in a month. That question should reveal conditions, fees and hidden triggers, she says. The same goes, she adds, for venture funds, commodities, derivatives, currency arbitrage and other “opportunities” promoted as fast-in, fast-out, easy money. The tipoff is that the offer comes with lots of pressure for an immediate decision to catch a fleeting opportunity, Williams says.

10. Penny stocks. Steer clear of penny stocks, which are low-priced, thinly traded shares that are generally considered speculative investments, according to the SEC. These securities, which may seem like bargains because they typically trade at less than $5 share, can be difficult to sell, the SEC says, adding that since it may be tough to find quotes for certain penny stocks, “they may be difficult, or even impossible, to accurately price.”