Wallace Rivers:
"Auction Rate Securities have been mentioned to a friend of mine as a possible alternative to a money market or CD investment. Has any one had any experience with these ar any knowledge of these?"
..."This friend is totally unsophisticated, has his retirement assets (he's a state employee) in mutuals through the state plan...Unfortunately, he is unsophisticated enough to not even have a COMPUTER, and bricks and mortar banks don't offer the rates that one can get online."
Ah jeez. If people on this thread won't or can't get their value brains around something called "Auction Rate Securities", your friend has NO business, NONE, in being seduced or sold into these things.
en.wikipedia.org
He's possibly lucky he's got you to help him with other things - mutual funds, maybe some of the Pimco stuff talked about here. I don't know.
One hard lesson I've learned is that the dollar losses involved in these things can be surprisingly - very surprisingly -- large in comparison to stock price declines and losses there. That is, if somebody buys a few shares of a stock and it declines 50%, that's a dastardly shock, but the amount of money is relatively small (because just a few shares were bought).
Now contrast that with someone who instead of going for a financial instrument that yields 2.5%, wants some non equity thing that's a "little" more risky, but yields say 5%. Then the bet to be worthwhile - imo anyway - has to be somewhat large to make this switch. I mean if it's $20K invested, there is not much gain at all to be had... an additional 2.5% or $500, over a year. Why bother to give up safety/surety/peace of mind for an extra $500? So maybe the person would be wanting to put up instead of $20k, maybe $40K or $60k or $100K into one of these investment products to get a decent size larger $$ return. (Like $2500 additional on a 5% yield on $100K vs. 2.5% on the 100K in a safer vehicle) And therein lies the danger. Even a 10% drop - or such a fluctuation - in something --maybe something like an auction rate security (I don't know) now means the $100k is down 10K. That is a big $ loss - maybe horrific - to see for somebody who is not used to losing money. (I.e. somebody who's unsophisticated or inexperienced with stock fluctuations.)
Oh well, all jmo. I don't know who's telling your fried to buy auction rate securities - maybe it's somebody who really knows his or her stuff about the subject and can help your friend. One thing I know I want to stay away from though is any 'investment product' that someone wants to sell me. And I want to stay away from such salespeople too. |
