Spooky Investments

There’s a saying around our office: “As a general rule, we don’t like to experiment with other people’s money.”

It’s not flashy, but it’s true. Our investment approach is grounded in decades of academic research and real-world evidence: steady, disciplined, and, yes, perhaps a little boring on the surface.

But in a world overflowing with “new opportunities,” exotic funds, and trendy financial fads, there’s no shortage of products that can send a chill down an investor’s spine. So, in the spirit of Halloween, we’ve dusted off our list of the spookiest investments, the ones we deliberately steer clear of.

A Quick Guide Before You Dive In

As a rule of thumb, anything marketed as a “product” tends to be opaque, complex, and often designed to benefit the seller more than the investor. And that’s the kind of fright we’d rather avoid.

Below, we’ve broken down a few investment types that can be trickier (and riskier) than they at first appear, especially if you’re someone who’s in it for the long haul:

• Investment: The product or strategy in question
• Summary: A brief explanation of how it works or is structured
• Concerns: The main risks or drawbacks that make it potentially problematic
• Examples: Specific types or variations of the investment

Structured Products

Summary: 

Created by investment banks that often combine two or more assets, and sometimes multiple asset classes, these products pay out based on the performance of the underlying assets.

Concerns:

• Complex
• Illiquid
• Opaque expense structure or investment selection
• Positioned as “safer” investments, but they still subject investors to principal loss

Examples:

• ELKS (Equity Linked Securities)
• LEAPS (Long-Term Equity Anticipation Security)

Managed Futures

Summary: 

An alternative investment vehicle frequently used by large funds and institutional investors to achieve both portfolio and market diversification through leverage.

Concerns:

• Expensive
• Risk that’s hard for investors to quantify
• The use of leverage can amplify gains but also magnify losses

Examples:

• Momentum trading
• Market-neutral strategies
• Options overlay

MLP (Master Limited Partnership)

Summary: 

A type of business structure that combines elements of general partnerships and corporations, an MLP consists of two types of partners: general partners and limited partners. These kinds of investments are typically limited to real estate and natural resources.

Concerns:

• Illiquid
• Opaque fee structure

Leveraged Funds

Summary: 

A marketable security that uses financial derivatives and debt to amplify the returns of an underlying index. Leverage here is a double-edged sword, meaning it can lead to significant gains but also to significant losses.

Concerns:

• Increased fees needed to create leverage
• Opaque investment structure
• Can lead to significant short-term losses
• Not ideal for long-term investment

Examples:

• Double- or triple-leveraged funds
• Futures, forwards, and swaps

Private Equity (issued through a brokerage or wirehouse channel)

Summary: 

Private equity firms buy companies and overhaul them to earn a profit when the business is sold again. Most private equity firms and funds invest in mature companies, extracting value before exiting the investments years later.

Concerns:

• Illiquid
• Investors far removed from direct investment of the underlying holdings
• High cost
• Tax inefficient

Non-Traded REITs (Real Estate Investment Trusts)

Summary: 

Not listed on public exchanges, but can provide retail investors access to otherwise inaccessible real estate investments.

Concerns:

• Expensive
• Highly illiquid

Cash Value Life Insurance

Summary: 

Permanent life insurance, which can accumulate cash value over time.

Concerns:

• Substantially more expensive than term life insurance
• Opaque expense structure
• Inefficient savings vehicle
• Illiquid

Examples:

• Whole life
• Universal life (fixed, index and variable)

Annuities

Summary: 

An insurance contract issued and distributed by financial institutions with the intention of paying out invested funds in a fixed income stream in the future.

Concerns:

• Expensive
• Illiquid
• Limited investment selection
• Potentially tax inefficient

Examples:

• Immediate
• Fixed
• Indexed
• Variable

Digital Currency (“crypto”)

Summary: 

Investing in cryptocurrency is a high-risk, high-reward venture that requires careful research and a strong understanding of its volatile nature. Unlike traditional stocks, which represent ownership in a company, buying crypto is a bet on the digital asset’s value increasing over time.

Concerns:

• Highly speculative
• No intrinsic value
• Extreme volatility
• Lack of regulation and oversight

Examples:

• Bitcoin
• Ethereum
• Binance
• Solana