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Making Your Money Last

10 Investments You Don't Need

A selection of stinkers sure to be hazardous to your wealth.

Single-state stock ETFs

In a pitch to local pride, one promoter is trying to launch exchange-traded funds that track indexes of Texas and Oklahoma stocks. Granted, those states are in better financial shape than most, but in each case the ETF would be dominated by energy stocks. Why should anyone care whether a producer of oil and gas -- which are, after all, commodities -- hails from Dallas or Tulsa rather than Denver or Dubai?

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Two years ago, a different money-management firm toyed with StateShares. It was the same kind of idea, but on a nationwide basis -- that is, an ETF for each of the 50 states. It never came to fruition, and just as well: The wheels would have come off the Michigan fund. The New York portfolio would have gone the way of American International Group, Citigroup, Merrill Lynch and the rest of what used to be known as Wall Street. Good businesses just aren't that local anymore.

Absolutely awful

The phrase absolute-return fund casts a wide net. But be especially wary of funds that claim they'll beat inflation by a certain number of percentage points each year. Putnam recently launched four such funds, which it hopes will beat Treasuries by one, three, five or seven points annually by darting among bond and stock sectors. Research from Morningstar shows such strategies rarely deliver on their promises.

Currency roulette

True story: One day not long ago, a New York City subway car was lined from end to end with ads for a get-rich-quick trading scheme involving the dollar, the euro, the British pound and luck. To play, you needed $2,000, an understanding of all the flashing numbers on your computer screen, and the chutzpah to guess when and whether the U.S. dollar would be worth more or fewer scraps of the world's other currencies.

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This game goes on all day and all night, so you can wake up that much richer -- or poorer. It's like electronic roulette, except roulette is undeniably a game of chance, and promoters of currency trading claim that forex (foreign exchange) involves skill and knowledge. An expert told us that 90% of those who try this stuff lose money. That's unacceptable for something that's held out as an investment instead of a wager.

Gold bars just left of the Snickers

Yes, vending machines that spit out gold bullion are now popping up in airports and train stations. So far, the Gold to Go machines, dreamed up by German company TG-Gold-Super-Markt, have been installed only in Germany, but the company says it plans to expand to other European locations. Travelers can buy small coins, wafers and bars up to 10 grams in size for a whopping 30% markup to market prices. In test-runs the machines had some trouble giving the correct change.

REITs under lock and key

How can you fathom a real estate investment that denies you the opportunity to gain from rising property values? In a non-traded, or private, real estate investment trust, you pay a fixed price (typically $10) for each unit, and you get regular dividends from the income produced by rents from offices and shopping centers.

But private REIT units don't trade, except during certain windows of time when you can redeem them to the issuer on the issuer's terms. No problem, you may say, given that the shares of traditional, publicly traded REITs crashed during the bear market (along with so many other kinds of stocks). But property values will surely recover, and prices of public REITs will rise to reflect those higher values.

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Private REIT investors, however, get no such benefit unless the trust liquidates -- and even then, double-digit-percentage sales charges and high annual fees will erode the gains. Moreover, many private REITs have suspended all redemptions. That has Finra, the financial industry's watchdog, examining the sale and promotion of these illiquid deals.


Overpriced buffet with Buffett

No offense to the Oracle of Omaha, but the Toronto investment firm that recently won an auction for the right to have lunch with Warren Buffett definitely overpaid. Even a few hours with the Great One isn't worth $1.68 million. Granted, whoever attends from the victor, Salida Capital, will walk away stuffed with folksy Nebraskan wisdom. And Buffett, after all, isn't keeping the money, which is going to charity.

But a smarter way to pick Buffett's brain is to buy shares of Berkshire Hathaway. With $1.68 million, the folks at Salida could have bought 15 of Berkshire's Class A shares (BRK-A) at the going rate (as of August 7) of $108,100 each. With the stock trading at 1.6 times book value (assets minus liabilities), they'd have gotten a better deal, and they'd have had $58,800 left over in pocket change. That's enough to pay for a few repasts at Canada's finest restaurants plus cover the costs of traveling to Omaha next May for Berkshire's annual meeting -- at which Buffett normally waxes eloquent for hours about the markets, the economy and his company.

Raw deal in real estate

It sounds as if we're picking on real estate, but here's another really wacky idea involving property: Buy a vacant house in a supposedly cheap neighborhood from one of those outfits that say "We buy ugly houses," pray for divine intervention, and wait for a developer or speculator to take the property off your hands.

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This isn't the same as buying a habitable house, a strategy that can work if you know something about being a landlord. We're talking about bricked-up hulks in derelict parts of cities, such as Buffalo and Baltimore, that haven't been livable since the '50s. The Web-site pitches are enticing -- and the prices are super-low -- but even vacant properties will drain you for taxes, insurance and security.

Clipped by hedging

The marketing materials for principal-protected funds sing a sweet siren song: Here, finally, is an investment that lets you collect the stock market's gains while protecting you from ever losing money! But keep listening and the tune slips off-key. For example, the S&P 500 Capital Appreciation fund (symbol SSPAX) is indexed only to the price gains of the S&P 500, meaning that investors miss every penny of the market's dividends. The costs of hedging against the possibility of negative returns eat up a big portion of whatever measly gains you might still be left with -- assuming that the people in charge actually know how to hedge.

A bankrupt strategy

It's a common temptation: A well-respected company's shares are down to $1 or less, but it's still in business and people and politicians are anxious to save it (yup, think General Motors), so you buy the stock. You figure that the upside is way more than the pittance you're putting in, and you hope that the bankruptcy court will be lenient or that the company manages to find new financing and avoids reorganization.

The problem is that the "old" stockholders generally get wiped out. Federal-Mogul (FDML), an auto-parts maker that was once in bankruptcy reorganization, is very much alive now. Its stock trades for $15, more than triple the $4 it fetched early in 2009. But those are new shares that were issued post-bankruptcy. Investors who paid as little as 15 cents -- or as much as $1.30 -- for Federal-Mogul shares in 2006 and 2007 have only warrants that are nearly worthless, table scraps from the bankruptcy settlement. Similarly, you should avoid shares of the old General Motors, now called Motors Liquidation Company (MTLQQ.PK). Those shares will almost certainly be rendered worthless once the bankruptcy court finishes its work.

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Sucker's bet on housing

In the chasing-a-horse-that's-already-left-the-barn department, Yale professor Robert Shiller has put his name behind two exchange-traded products that allow you to bet on U.S. home prices. The MacroShares Major Metro Housing exchange-traded securities let you chase either three times the movement of the Case-Shiller index of home prices in ten major U.S. cities or three times the inverse of the index's movement.

But because of technical quirks, the securities are unlikely to track the indexes properly. Instead, investor expectations for housing values will probably determine how the securities trade. But the timing of the products' launch -- as home prices begin to stabilize -- and their 1.25% expense ratios are the biggest strikes against this dumb idea.