Several ways to lose money fast – and how to avoid them; Illiquid 'alternative assets' and SPACs are risky investments; Meta Platforms won't crack down on the 'epidemic of scams' on its apps; Romance scams and paper-check fraud

1) Most investors – and those who advise them – spend the vast majority of their time looking for ways to make money. But an equally important key to long-term investment success and financial security is avoiding big losses. And there are so many ways this can happen...

One is getting sucked into fads, frauds, bubbles, and other types of risky investments in the markets. Look, I'm not going to argue with you if you want to take 5% of your portfolio and bet on a handful of things like zero-days-to-expiration ("0DTE") options, bitcoin, or a small biotech company with an exciting new drug. Just make sure the rest of your portfolio is invested in cash, bonds, blue-chip stocks, and diversified funds (ideally index funds like the S&P 500 Index).

2) Another way to lose a lot of money quickly is investing in illiquid "alternative assets" like private companies, real estate, hedge funds, etc. – and, unfortunately, the U.S. Securities and Exchange Commission ("SEC") is trying to open up these investments to average folks, as this Wall Street Journal article notes: SEC Chair Signals Investor Access to Private Markets Could Soon Broaden. Excerpt:

SEC Chairman Paul Atkins said at an annual regulatory conference that he would direct the agency's staff to reconsider guidance that inhibits how much closed-end funds can invest in private funds, such as hedge funds and private-equity funds.

Currently, closed-end funds that invest 15% or more of their assets in private funds must restrict sales to investors who satisfy what is known as the accredited investor standard.

WSJ columnist Jason Zweig reports on this in two pieces, the first from a month ago: Don't Buy Into This Easy Fix for Stock-Market Craziness. Excerpt:

With the stock and bond markets stumbling in unison, investment firms and financial advisers are pushing so-called alternative funds harder than ever...

That could be great if firms like Vanguard and Schwab, which for decades have crusaded to cut costs for investors, can lower the larcenous fees that alternative funds customarily charge...

At their best, alternatives – which can include hedge funds, venture capital, private-equity funds, nontraded real estate, private credit, infrastructure and other assets – offer lower risk, higher income or total return, and valuable diversification into areas that are otherwise inaccessible.

Despite the potential positives, Zweig warns that there can be huge risks:

But alternative funds value their holdings outside the public spotlight, and those underlying assets don't trade in liquid markets. Financial advisers love to tell investors that alternatives have "lower volatility" than publicly traded investments. That isn't like comparing apples and oranges; it's like comparing apples and asteroids.

And you're getting invited to a party that may already be winding down. Many institutional investors, glutted with private assets, are twiddling their thumbs waiting to get their money out. Private-equity firms are sitting on more than 29,000 companies, valued at $3.6 trillion, that they can't unload. Returns for many alternatives have stagnated. Why buy what these folks are trying to dump?

And on May 16, Zweig analyzed the Redwood Private Real Estate Debt Fund (CREMX), a $376 million basket of short-term real commercial property loans, to highlight the risks and sky-high fees of alternative assets: This New Investing Idea Isn't Right for Your Retirement Plan. Excerpt:

It's an interval fund, meaning you can buy whenever you wish but can sell only four times a year. Those quarterly redemptions are normally limited to a total of 5% of the fund's net assets. If lots of other people also want to get out, you might not be able to sell all (or any) of your holdings...

The interval fund's total expenses (which include the management fee and several other costs) exceed 5% – roughly 100 times what many exchange-traded funds cost.

Redwood's interval fund is leveraged, borrowing more than 25% of total assets. That magnifies both its gains and any potential losses – effectively turning each dollar the mutual funds invest in it into roughly $1.25 of exposure.

As Zweig concludes:

Assets that don't trade every day aren't low risk just because they don't trade every day. And, until costs come down and conflicts of interest are ironed out, stuffing private assets inside a fund that does trade every day is a rotten idea for retirement savers.

I echo Zweig's warnings that the vast majority of investors should avoid alternative assets and funds heavily invested in them.

3) Another area to be cautious of is special purpose acquisition companies ("SPACs"), which experienced a huge bubble in 2021, followed by a painful bust. But now they seem to be having a resurgence, as this recent New York Times article notes: Wall Street's Riskiest Stock Deals Are Back, With a Trump Bump. Excerpt:

This year, 45 SPACs have raised money, and 21 of those have come to market in the past month. Bankers and investors said sponsors were planning for many more in the coming weeks and months.

As Bitcoin and crypto assets continue to trade higher, many of the latest SPACs have either explicitly noted they're hunting for crypto deals or simply raised the possibility of doing such a deal in investor meetings.

But there are risks abound, as the article notes:

For any investor jumping into the SPAC market, it's a speculative gamble. Investors hand over money and have no idea what the sponsors might buy. Because the stock is publicly traded, they're betting on the chance it's a great company.

But the potential of a deal isn't always as glorious as what investors imagine it might be, said Evan Ratner, president of the investment manager Levin Capital Strategies.

"The promise of something exciting is often more valuable than the actual deal," he said.

This is another sector to avoid at all costs!

4) There are countless ways to lose money outside the markets, as well...

This WSJ article underscores what I've been warning my readers about for years – the Internet is increasingly filled with ever-more-sophisticated scammers: Meta Battles an 'Epidemic of Scams' as Criminals Flood Instagram and Facebook. Excerpt:

Meta Platforms, the parent company of Facebook and Instagram, is increasingly a cornerstone of the internet fraud economy, according to regulators, banks and internal documents reviewed by The Wall Street Journal.

The company accounted for nearly half of all reported scams on Zelle for JPMorgan Chase between the summers of 2023 and 2024, according to a person familiar with the service...

With more than three billion daily users on Meta's platforms, fraud is hardly a new phenomenon for the company. But fed by the rise of cryptocurrencies, generative AI and vast overseas crime networks based out of Southeast Asia, the immensity of Meta's scam problem is growing and has been regularly flagged by employees over the past several years.

However, it appears that Meta Platforms (META) isn't cracking down on this scam activity because it's highly profitable for the company:

Current and former employees say Meta is reluctant to add impediments for ad-buying clients who drove a 22% increase in its advertising business last year to over $160 billion. Even after users demonstrate a history of scamming, Meta balks at removing them.

One late 2024 document reviewed by the Journal shows that the company will allow advertisers to accrue between eight and 32 automated "strikes" for financial fraud before it bans their accounts. In instances where Meta employees personally escalate the problem, the limit can drop to between four and 16 strikes.

Adding to the problem is Marketplace, its online secondhand-market that in less than a decade since its launch has surpassed Craigslist to become the internet's most heavily used repository of free classified ads. Its peer-to-peer model has also made Marketplace a popular hunting ground for scammers.

Hopefully this article will pressure Meta into taking action. Either way, I continue to urge my readers to be careful of scams not just on social media, but also in e-mails, texts, WhatsApp messages, etc.

5) This unfortunate story in New York Magazine's The Cut is all too common, as dating apps and websites have given rise to romance scams: How My Father's 'Girlfriends' Scammed Him Out of $45,000. Excerpt:

It was only after my father died that I got access to his conversations with the creatures who fleeced him. He was so enamored by the members of what he jokingly called his "harem" – women online who may not have existed in real life but who nonetheless ran off with his money – that he printed the transcripts of their dialogues and filed them in metal cabinets in his office...

Vasilisa, whom he'd met on Dream Singles, a dating website, was five-foot-five-inches tall, 108 pounds... What was her real identity? My father never speculated. He believed in Vasilisa. I thought perhaps she was a canny AI bot or perhaps some dude in his mom's basement in Moscow. There was some slight chance she was a real woman who'd signed up to meet her dream man.

6) This NYT story details another area to be careful of – paper checks sent through the mail: His Life Savings Were Mailed to Him by Paper Check. Now, It's Gone. Here's what the reader sent to columnist Ron Lieber explaining his situation:

Last year, I lost my entire 401(k) – $114,000 – after Paychex mailed me physical rollover checks instead of doing a secure transfer. The checks were intercepted and fraudulently cashed.

I'm now in federal court trying to hold Paychex accountable, but this experience has made it painfully clear how little protection exists for consumers in situations like mine. For some reason, this outdated and insecure method remains standard practice in the retirement industry.

Lieber gives a few tips for dealing with paper checks, such as requesting the most secure possible mailing process and watching your account every day to ensure the deposit is made. But even if you avoid paper checks and go fully electronic, fraudsters and thieves still exist in the digital realm.

In summary, you must stay diligent to protect your money and try to avoid the many traps and landmines out there!

Best regards,

Whitney

P.S. I welcome your feedback – send me an e-mail by clicking here.