FINRA (the Financial Industry Regulatory Authority) publishes investor alerts. They are actually worth reading, or, most of them are. The FINRA site is also not a bad place for the beginning self-directed investor to poke around to gain knowledge.
FINRA’s latest alert is called The Grass Isn’t Always Greener—Chasing Return in a Challenging Investment Environment. FINRA is concerned that given the challenging environment — trading ranges, vascillating market, etc., that investors may dig themselves into a hole and end up with investments that just aren’t suitable for them. One of the issues of concern is leveraged products, a hot-button issue for me. FINRA has an older alert on leveraged and inverse products that I honestly wish everyone would read.
I think of leveraged products as being rather the equivalent of a financial chainsaw. If you know how to use one, and exercise all the proper precautions, a chainsaw can be an awesome tool. But if you don’t know what you are doing you can cause some pretty serious damage. And exactly the same is true of leveraged products and I am thinking ETFs here.
A number of stock-picking services, and I am thinking of one in particular, will blithely introduce their subscribers to leveraged and leveraged inverse products without ensuring that their subscribers, many of whom are pretty new to the investing game, know the caveats that should be applied.
I have done well from leveraged products, but I have also suffered pretty badly too, although in the latter case I also broke or ignored just about all my own rules. Some lessons are paid for with real money, but it wasn’t the difference between hamburger or steak. Others may not be so lucky.
A fool and his money are easily parted. Hmm. And so might many an unwary investor to leveraged products. I have a pretty simple test. If you wouldn’t deal Forex, deal in Futures contracts or go short naked, you have no business thinking about leveraged ETFs.