Over the last decade investors and home-owners experienced a series of brutal beatings in what was historically a very short period of time.
Many investors took heavy losses in the 2000-2002 bear market when even the blue chip S&P 500 lost 50% of its value. Many then got caught up in the housing bubble, maxing out mortgages that were unsafe unless home prices kept rising at a record pace. They lost sizable amounts when instead the housing bubble burst and home prices plunged. In too many cases they lost their homes as well. No sooner had the stock market recovered in the 2003-2007 bull market than investors lost heavily again in the 2007-2009 bear market, when once again the S&P 500 lost 50% of its value.
For many the good life has taken a decided turn for the worse. And that has resulted in a willingness to take unusual risk in an effort to make a quick recovery. It just won’t cut it to steadily re-build financial stability by traditional means. There has to be a way to get it back fast.
Unfortunately, it has many taking the same approach that got them in trouble in the first place, when they were ignoring the old adage that if it seems too good to be true, it is. They believed the promises of experts on Wall Street that dotcom companies with no earnings had not become overvalued, and their stock prices would rise at a similar pace endlessly into the future. They believed the promises of experts selling real estate and mortgages that houses that had already quickly doubled in price would increase in value at a similar pace endlessly into the future.
Burned by previous excess enthusiasm for easily understood products like stocks and mutual funds, and determined to get it back quickly, they have moved far out the risk curve, now enthusiastic about investments they know much less about, including speculating in currency exchange rates (Forex trading), and commodities.
Commodity trading has always pretty much been confined to forward-selling or hedging of production by large corporate growers of coffee, soybeans, tobacco, cotton, and livestock; and by oil companies and miners, each using futures contracts to protect their businesses from the ups and downs of commodity prices - and speculation by professional commodity traders including hedge funds.
Currency trading has always been pretty much confined to financial institutions and professional traders. The main players were governments, central banks, financial institutions, corporations (hedging their cash flow from international operations against unexpected changes in currency values) - and professional traders and speculators.
But since 2008, retail investors have piled into both scenes.
Here are some expert opinions that retail investors should consider:
The Commodity Futures Trading Commission (CFTC) says ‘Currency trading has become the fraud du jour since early 2008.”
The North American Securities Administrators Association says “Forex-trading by retail investors is at best extremely risky, and at worst outright fraud.”
The president of the Financial Markets Association, a European body, says, “Banks have a duty to protect their customers and make sure customers understand what they are doing. But if people go online, on non-bank portals as in forex-trading, how is this control being done?”
Regulators and investor protection groups warn retail investors to be wary of the potential for churning of customer accounts to generate commissions, software that is supposed to guide the customer to large profits without the need for in-depth knowledge and expertise, and false advertising indicating that forex trading is a low risk, high profit investment.
Real estate investing is also providing ‘get it back quickly’ opportunities that might not be quite what they appear to be.
With courthouses clogged by foreclosure auctions, more than two dozen counties in Florida have moved their foreclosure auctions online, allowing bidders to bid on foreclosed properties via the Internet. As with currency and commodity trading sites, the auction websites are full of warnings, cautions, and instructions on how to investigate the financial details of the property, and what precautions need to be taken.
But it takes considerable care and due diligence. There are numerous types of foreclosures, and potential for various undisclosed liens on the property, as John Dey, an accountant in central Florida, whose wife is a realtor, found out, according to an article in the Orlando Sentinel.
The Deys had carefully inspected the house and the legal foreclosure documents. Once the auction began they were excited to see there was only one other prospective buyer bidding against them, which perhaps should have been a warning sign. They were even more excited when the other bidder dropped out. The Deys had purchased a house they estimated was worth more than $200,000 even in this depressed housing market, for just $20,000.
Too good to be true?
It turned out the foreclosure proceeding the court had approved was by the development’s homeowners association, for non-payment of association dues. It had nothing to do with the $200,000 mortgage on the house, which the bank had not yet foreclosed on, and remained in force. The Dey’s were out their entire $20,000 ‘investment’ plus auction fees and expenses.
It’s just not easy to get rich quick. Investors who did not navigate the previous periods successfully might find that re-building their wealth is more likely through traditional investment in stocks and bonds, but with more care and awareness of risk when valuations become excessive this time around.
By. Sy Harding
Sy Harding is editor of the Street Smart Report, and the free daily market blog, Street Smart Post