Oct 2
2013

At a recent State Securities Board investor education presentation, the first question from a member of the audience was, “What do you think of the Iraqi dinar?” The woman and her husband had purchased some dinar notes after a salesman assured them the dinar would skyrocket in value once the Iraqi government revalued its currency.

Another question concerned investing in the shares of penny stocks, a particularly volatile and opaque corner of the stock market.

After the presentation, one person mentioned being solicited to invest in precious metals. Another said she’d been approached to invest in the rehabilitation of houses and other properties.

The topics change from time to time, but these are pretty typical “alternative investment” questions at investor education presentations. Sometimes they’re asked before an investment product is purchased (that’s good); other times, as with the dinar notes, the questions come afterward.

These questions are often rooted in fear. There is fear of missing out on good returns, even though a big payoff is as likely as a "Sharknado" hitting Austin. And there is fear, and distrust, of the mainstream markets.

Investor psychology is beyond the scope of this Investor Alert, but there a few steps investors can take, and a few questions they can ask themselves, to avoid sending their money on a permanent vacation.

  • Read credible research. The Iraqi dinar scheme has been surprisingly long-lived, giving federal and state regulators and nonprofit consumer groups time to issue warnings about the dinar and other foreign currency investment opportunities. Reputable financial columnists have found plenty to dissect about the dinar investment play. (Regulators have also made penny stocks a staple of their warnings to investors. Gold and precious metals too.)

  • Read the prospectus or offering document. You should receive a written statement that provides all relevant information about the investment and the company selling it, including the company’s history, operations, financial conditions, and key personnel. No prospectus? Don’t invest.

  • Deal with registered salespeople. If you’re considering an investment opportunity you will most likely want to deal with a registered individual. Registering with the State Securities Board involves testing requirements, background checks, and periodic inspections. To see if a person is registered to sell investments or render investment advice in Texas, see the Registration Checks section of the State Securities Board website or call 1-888-663-0009.

  • Understand the sales pitch. A salesperson may  be able to make investing in dinars, South Texas oil and gas leases, and real estate development sound reasonable – even irresistible — but ask yourself if you really understand the investment. You may be able to find a trusted third party who can help you determine the validity of the investment.

  • If I buy the investment, then what? Who is going to buy the dinars you have in a drawer in your house? Or the gold which you may have bought at an inflated price and paid a high commission for the privilege of doing so. While there are no guarantees in the return of, say, a mutual fund that invests in stocks, you can at least sell it the day after you bought it.

  • Finally, why would you succumb to the siren song of alternative investments when you can learn the basics of investing in stocks, bonds, and other more transparent assets? To learn time-tested truths about  investing and the steps to take to avoid investment fraud, see the State Securities Board's Texas Investor Guide: Strategies for Investing Wisely and Avoiding Financial Fraud. Print copies are available for free by emailing Robert Elder, Communications & Investor Education Coordinator, at relder@ssb.texas.gov. Please provide a mailing address and the number of copies you would like to receive.

The message is simple: Long-term investors who watch their costs, allocate their assets, and diversify their portfolios (to name just three areas that are covered in-depth) tend to accumulate savings despite the ups and downs of the market. Investors who are lured into a scam are likely to see their money, or a big chunk of it, disappear forever.