Beware Of Wall Street Stories Promising Better Returns

After 10 years of declining stock market values and record low interest rates, Wall Street senses that you're open to new investment stories that promise opportunities for better returns. Remember, these are the same people that brought you the tech bubble and the global financial crisis. So as you listen to their stories about new and better ways to make money, you'd be wise to keep your guard up.

Here's the deal. Global economic output is pretty anemic, and that means returns are likely to be modest until things get better. But that's not the story frustrated investors want to hear, and it's hard to attract new money if you tell that story. So Wall Street is spinning some new stories (with all of the appropriate disclosures and disclaimers in the small print) to access to your money.

Here are some of the strategies that I see being marketed most heavily today, and the things I would be quite skeptical of:

Emerging Market Stocks. Since everyone is convinced the US stock market is doomed, why not put your money into stock markets that are "emerging." That sounds a lot better than stock markets that are stagnating. And Wall Street paints a pretty good picture for how these emerging markets will outpace the big, slow and bloated US economy.

Well, don't be so sure of that. Emerging economies have very little history with the capital markets and their stock markets are quite immature. Moreover, you can be sure that whatever problems we have experienced in our stock market as we emerged into a global power, they will as well if they're fortunate enough to make the transition. Don't expect your long term returns in foreign equities to be much different than what you get in domestic markets; and in fact they could be worse if these economies fail to make the transition to mature markets.

And by the way, what do you really know about these markets?

• For instance, who is the equivalent of Ben Bernanke for the Brazilian economy? Or, what South Korean agency serves in the same regulatory role as the SEC does in the US? If you can't answer those questions, then you probably don't have much business investing aggressively in these markets.

In fact, some are promoting emerging market debt as potentially safer than US debt. That's just preposterous to me. Emerging market economies are no where near as sophisticated and deep as the US economy. Nor do they have the legal, regulatory and tax structure that makes US debt so safe. Before you fall in love with the emerging market debt story, study the history of sovereign debt defaults and see how often emerging market countries fill that list. Oh, and study the history of inflation in emerging economies. It makes our history of inflation look like a cakewalk.

Commodities. For some reason, people tend to believe that commodities have some amazing wealth building capacity that is de-linked from the overall global economy. Commodities as an asset class don't produce any income or earnings. The basic value commodities have is when they are put to productive use by companies that make and build things. So if you want to invest in copper, somebody better need copper to build something. Otherwise, you just have a lump of copper.

If you think commodities will increase in value long-term while global economies shrink, you might want to rethink that story. Be careful of people pushing commodities as a way to hedge against falling economic output. It doesn't make much sense does it?

Leveraged Investments. If you can't make much money using your own money, then you can of course make more money by borrowing someone else's money, right? That's the basic idea behind all sorts of leveraged investment strategies, from leveraged ETFs to leverage bond funds and trading strategies.

To my knowledge, there's no evidence that borrowing money and betting on the direction of various markets has a reasonable probability of working out for you. In fact, most of the time it works out terribly for investors. Excess leverage was the crux of the entire financial crisis and what brought down major Wall Street firms. They zigged, when they should have zagged, and lost tons of their own money and the money they borrowed. That's a death knell for an investor. Expect similar results if you borrow money and use that borrowed money to bet on the direction of asset prices.

The point here is you should be skeptical of new investment stories that tempt you with higher returns. Prospects for higher returns basically come with higher risks. Now, you may find some of these strategies appropriate as you round out and diversify your holdings. But don't expect some sort of miracle solution to the low return environment we currently have in the global markets. The US and European Union make up the vast majority of wealth in the world. As they go, so go the prospects for overall wealth creation around the globe, at least for now.

Bottom line. Stick with the fundamentals and be careful about jumping at investment opportunities that promise better returns without comparable risks. And save more. That's one way to combat a low return environment.

Learn More: Want to learn about a simple way to manage your personal finances and prepare for retirement, investigate my new book Your Money Ratios: 8 Simple Tools For Financial Security, available in bookstores and at amazon.com The Wall Street Journal called the book "one of the best finance books to cross our desks this year." WSJ 12/19/09.