>> So you've had some time to get your financial bearings, and you've decided to dip your toe back into the investing waters. Well stock brokers and mutual fund companies are seizing the opportunity to sell investments to often unsuspecting customers. And they're usually touting these investments as safe, and certain to earn money while losing none. Moneywatch.com's editor at large Jill Schlesinger is here to give us the real story behind these so-called safe investments. Jill, thanks for being with us.
>> Jill: Thank you.
>> Okay, first of all is there such a thing as a truly safe investment?
>> Jill: Every investment has risk. And what's most important to think about it, think it like a diet. Is there any such thing as a you eat as much as you want and don't gain weight diet?
>> I wish.
>> Jill: No, exactly. We all wish. So every investment has risk. Even if you just pop money into your savings account, there's a risk that it won't grow enough to keep up with inflation. So it's too good to be true, and no, it's impossible.
>> Advisors are pitching a few investments really hard these days. And most likely they're positioning them as low risk. What are these investments, and what are the hidden risks or costs associated with each of them?
>> A lot of advisors have been talking about something called a market neutral fund. What could that possibly be? Well it's a way to invest a core portion of your money. But the advisor will also trade a lot around it. Now that sounds a little Madoff-esque, so don't get too scared. It's nothing like a shenanigan. But what happens is the trading involved will hopefully make some money in the portfolio, and the core position won't lose too much money if things go bad. Here's the down side with the market neutral fund. They're expensive, on average almost two percent a year cost. Now you can compare that with about one percent for a managed mutual fund, or a tenth of a percent for an index fund. So that's not great. The other thing, because of all that trading, big tax liability if it's held in a taxable account. Also there hasn't been a long history, but they haven't done that well. So with all those great promises, it costs you a lot, and they're not really doing as well. Why do it?
>> Jill: Right. And any other funds that we should be aware of?
>> There's one called an absolute return fund. Now I think that's a terrible name. What they should really be calling it is the massive asset allocation fund. Because these funds really take a look and say let's look at your money and not just say stocks or bonds. Let's do a little bit of everything, some stocks, some bonds, some cash, some commodities. The reason why it's called absolute return is that it's giving you a return of all those blended asset classes. Here's the good news. When the market goes down, these types of funds will usually do better than the overall market. But when the stock market goes straight up, they won't do as well. So are you willing to take that risk? Eh, may not be worth it. Again, very expensive, not very transparent. We don't have a lot of track record on these as well. And -
>> Jill: That's never a good thing.
>> Not a great thing. And most importantly, because you don't really know which way the manager is going, they may be taking a lot more risk in ways you're not comfortable with at your core. There's a third investment that we want to talk about, and that is one that is particularly sneaky, because it's not just sold by stock brokers, it's kind of sold everywhere.
>> Jill: Well in the insurance world there's always this saying that says insurance is not purchased, it's sold. So insurance contracts are very convoluted. One in particular called an equity index annuity, that's a lot of words. Here's what it is. An annuity contract is a promise by an insurance company. You give us your money, sue me, we'll make sure that you get it back when you're fifty-nine and a half, ready for retirement, and you'll get all that nice tax deferral that you get in your retirement accounts. It's fantastic. Here's the other promise they make. If the market goes up by a certain percent, you'll participate to a lesser extent. But if it goes down, well you won't get hurt as badly. It sounds like a perfect product, doesn't it?
>> Sure.
>> Jill: Problems. Big cost, huge cost. Two to three times more expensive than mutual funds. They're also tying your money up. Your money has to stay in this investment till you're fifty-nine and a half. If you need your money before then, there is a massive penalty, and that's a big deal for people. And you know, when you really think about it, most people are investing for the long-term. But you want access to it if you needed it. This will not give you any access to your money.
>> Jill, thank you for arming us with the correct information. So-called safe investments, not so safe.
>> Jill: Not so much.
>> All right. For more information, head to Moneywatch.com.
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