by Archie M. Richards, Jr., CFP^®
September 8, 2003

A woman wrote to ask about an investment called a Universal Lease. She said a friend was considering buying it. The investment was sold only by "Resort Holdings," of South Bend, Indiana, and the "products" were in Cancun, Mexico. The investment offered a "return" of 9 percent. The woman wanted a "sound investment," paying more than bonds or savings accounts.

I brought up www.Google.com and wrote in the search box, "Universal Lease, South Bend." Up came numerous responses, but the first was a notice from the Arizona securities regulator. The headline read, "[The Arizona] Commission levies charges against resort timeshare program: Indiana man and three international companies charged with securities fraud."

That was easy. It was a bum deal.

I didn't engage in a long correspondence with the woman. But many people who are prone to purchase lousy investments have motives similar to the following:

• They want higher income than most stocks and bonds provide.

Investments these days don't generate pure income as high as 9 percent. They may pay 9 percent, but a large portion may be a return of the investor's own money. The Resort Holdings promoter said 9 percent return. He didn't say 9 percent income return.

Tricky.

Even for nonfraudulent investments, to obtain high income these days, it's essential for at least some principal to be consumed. One good example is a reverse mortgage, which turns your house into money. An insurance company pays you income for life in an ever-expanding loan secured by your house. When you die or move, the house is sold and the loan is repaid. If the proceeds are greater than the loan balance, you receive the difference. If the proceeds are less than the loan balance, the insurance company absorbs the loss. (For more information, see www.archierichards.com for the column dated July 14, 2003.)

Another appropriate source is an immediate annuity. You buy an annuity policy and "annuitize" it right away, meaning the insurance company begins paying income for life. You can choose any of several payment formulas. You might select income for life and for ten years certain, for example. You'd receive income for as long as you live, but if you die within ten years, your beneficiaries would receive the same income for the remainder of the ten years.

The asset allocation program I recommend (see my June 30, 2003 column) generates income of about 3.5 percent. Over time, I expect the portfolio to gain 10-to-12 percent per year. Withdrawals of 5 percent per year should still enable the program to continue growing. But if you withdraw 9 percent, there's a good chance the investments would become exhausted before death.

Withdraw a lesser amount of income now, to have more later.

• Stock and bond prices are volatile.

We've suffered a three-year bear market in stocks. Bond prices did well during most of that time, but they took a bad hit in just the last few months. The economy is only starting to gain strength, and unemployment remains high. It's nerve-racking.

But there are always reasons not to buy stocks and bonds. If this weren't so, the prices would be much higher. Current prices are always perched halfway between the optimists and the pessimists. Forget the bad news. Get in anyway.

• The daily pricing of stocks and bonds sets a person's nerves on end.

Stock prices are constantly jiggling up and down, provoking anxiety. The value of the Resort Holdings program couldn't have been checked in the newspaper. What the woman didn't know wouldn't hurt her, right? Her friend said the investment was good. It should have been okay, right?

Wrong. Resort Holdings was a sure loser. Fortunately, the woman got a second opinion. But even a quick search of the Web would have raised a huge red flag. When someone suggests a special, can't-miss, private investment, be sure to conduct careful research.

For the best and safest results, look past your fears about stocks. Diversify to index funds of domestic stocks, foreign stocks, real estate investment trusts, and bonds. Plan on holding for the long term and disregard daily price changes. Check 'em once a year. That should do it.