10 investment traps to avoid

By Cameron Huddleston, Kiplinger.com — 08/03/10

Watch out for these products and practices that can drain – rather than boost – your wealth.

Investors tired of paltry returns and battered portfolios may be tempted to look beyond traditional investments, such as stocks, bonds and mutual funds. But they should be wary of any products and practices that promise a path to riches. Here are the top ten traps.

1. Leveraged ETFs
Exchange-traded funds -- which hold a basket of securities that track the performance of a specific stock index, bond index or other benchmark -- aren't necessarily dangerous. But leveraged ETFs -- which seek to double or triple the returns of an index -- use complex maneuvers that don't benefit long-term investors. These funds can guarantee achieving their goals only on a daily basis. Investors who hold these ETFs longer than a day can lose big.

2. Foreign exchange trading schemes
This is a real money loser for most investors because promoters of foreign currency (forex) trading charge high commissions and some are merely running Ponzi schemes.

3. Gold and precious metals
Watch out for sellers who offer to retain “purchased” gold in a “secure vault” and promise to sell the gold for the investor when it gains in value. In many instances, the gold does not exist. If you're interested in owning gold, you might consider investing in a gold fund.

4. Green schemes
Scammers try to lure people by offering opportunities to invest in new green technologies. They also try to exploit the headlines with claims that investors can profit from environmental disasters, such as the Gulf of Mexico oil spill.

5. Oil & gas schemes
Although investments offering profit participation in oil and gas ventures can be legitimate, revenues can be absorbed by high sales commissions and dubious expenses. Some promoters structure these ventures to avoid regulation and deprive investors of protections. A better option: pipeline master limited partnerships, which own and operate oil- and gas-pipelines.

6. Affinity groups
Scam artists target members of religious, ethnic, professional and other affinity groups by using the group's name to promote an investment and asking potential investors to trust the legitimacy of it. Always seek further information from an independent source.

7. Undisclosed conflicts of interest
Some securities salespeople don't disclose their financial incentives (such as big commissions) for selling certain products that may be risky or inappropriate for an investor. Always ask the salesperson how he or she is compensated.

8. Private or special deals
There are legitimate issuers of private deals -- opportunities for a small number of investors to invest in businesses that are trying to raise capital. But there are plenty of fraudulent ones, too.

9. “Off the books” deals
These are investments brokers offer on the side rather than through their employers. Not only are they risky because they're being sold without oversight from the broker's employer, but also they may be illegal.

10. Unsolicited online pitches
Just because you've seen an investment promoted on Facebook, Twitter or any other social media site doesn't mean it's legitimate. Con artists use these sites to promote fraudulent offshore investments with high-yield, tax-free returns or to spread misinformation about a stock to inflate its value before selling in a "pump and dump" scheme.