Another Reason It’s So Important to Manage Risk

For investors seeking attractive long-term returns, there are a lot of risks to navigate when investing in the capital markets. Fortunately, there are also a lot of ways to manage those risks.¹

Some risks are very familiar to most investors. Take concentration risk, for example. While investing in just a handful of stocks or a single category of risk assets can potentially generate outsized returns in a given year, it’s also a recipe for high levels of volatility and returns that are too correlated. In the event of pronounced selling pressure, there’s usually no neutralizing force to mitigate downside capture. If the bottom falls out, your portfolio might too.

Then there are lesser-known risks, like interest rate risk. When yields go up, the prices of bonds go down. In the fixed-income world, this can equate to rising interest rates resulting in weak returns on bonds. For long-duration Treasuries over the past two years or so, for instance, that’s meant a long stretch of weak/negative performance.

The return on 10-year U.S. Treasury bonds was -4.42% in 2021 and -17.83% in 2022, and additional losses were posted in the first half of 2023. The last time 10-year Treasurys posted back-to-back losses was in the 1950s, but those declines were less than -3%.²

Looking ahead, the Federal Reserve’s inflation fight does not appear to be over, and the economy has been performing better than expected in 2023. Both of these factors point to the possibility of higher rates in the future, which could have a direct—and adverse—impact on fixed-income returns. For investors, this means it’s important to actively manage fixed-income portfolios based on forecasts for interest rates, inflation, and economic growth, which is part of our process at Zacks Advantage.

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A Better Way Forward for Passive Investors

Passive investing using ETFs has become popular, allowing virtually every investor to participate in the stock market with an ETF index fund that tracks the S&P 500. Unfortunately, these funds make it difficult to beat the market—because an index fund essentially is the market.

Zacks Advantage offers a better way forward: We have always been committed to a research-driven investment process, and we have refined our active investment experience to optimize the passive investment realm. Our actively managed robo advisor offers:

• Targeted asset allocation
• Automatic diversification
• Built-in discipline
• Simplified investing – with low fees!

Learn more with our free guide, A Better Way Forward: Actively Managing Passive Index Funds ³

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Investors are aware that many other risks exist. But there’s one in particular that has come back into focus with the advent of an entirely new asset class – cryptocurrency. The risk is one that is as old as financial markets, but that also still somehow manages to swindle investors out of hard-earned money.

Scams.

According to a Washington Post-Ipsos poll, 10% of Americans have been victims in the past three years, and 20% know of someone who has been scammed. That’s millions and millions of people falling victim to illegal schemes.

This summer brought two headline-grabbing cryptocurrency scams that are worth highlighting, so investors can gain a clearer understanding of how the scams work and what to watch out for.

Scam #1: Richard Schueler, aka Richard Heart

In July, the Securities and Exchange Commission (SEC) charged Schueler with raising over $1 billion in investments in fraudulent, unregistered cryptocurrency offerings. According to the complaint, the SEC said Heart claimed that his Hex token was the first high-yield “blockchain certificate of deposit,” which would pay an average annual return of 38% and make people “rich.” The SEC claims that Schueler had investors pay him in Ethereum (which he then sold for gain), and that he attempted to evade securities laws by asking investors to “sacrifice” instead of “invest” their crypto assets into the fraudulent tokens.⁴

Meanwhile, Schueler was spending money lavishly on himself. He owned six and seven-figure Rolex’s, sports cars, and a 555-carat black diamond.

Scam #2: Eddy Alexandre

Alexandre started his scam locally, in his church community in New York. He claimed to have built a trading platform called EminiFX, which he told investors and friends was their “sure path to financial freedom.” Alexandre also got more specific with his investors, telling them – according to the complaint, that “if an investor invested $100,000, they would be a millionaire within two to three years.”⁵

The FBI says the exchange was a fraud.

Over time, Alexandre had solicited some $262.5 million in investment dollars, from tens of thousands of different people in the U.S. and abroad. From September 2021 until he was taken into FBI custody in May 2023, Alexandre raised $59 million. The allure was in the returns – every week, the platform would post returns of at least 5% in investor’s accounts. As part of the evidence gathered by the FBI, there was a photo of a whiteboard from the EminiFX offices that read, “Never less than 5% never more than 9.98%!”

Turns out that Alexandre invested very little of those investment dollars (about $9 million of the $59 million), and the money he did invest didn’t earn a positive return. The FBI complaint shows an online brokerage that posted over $6 million in losses. EminiFX doesn’t appear to have earned any revenue at all.

Instead, $14.7 million ended up in Alexandre’s personal bank account. That helped finance a lavish lifestyle, which included a $155,000 BMW.

Alexandre doesn’t enjoy those perks anymore – he pleaded guilty to one count of commodities fraud in February and has been sentenced to 9 years in prison.

Bottom Line for Investors

In order to earn positive, attractive returns over time, investors have to take risks. But all too often, investors are lured in by the promise of big, fast, seemingly risk-free returns that come with a promise of generating massive wealth quickly. But if it ever seems too good to be true, it’s probably because it is.

Scammers prey on this investor’s desire to make money quickly and easily, but if you’re ever offered a reliably high investment return with very little risk, your immediate first thought should be that something is wrong. Capital markets don’t work that way, and the person claiming that they’ve found a new, innovative way to make money without any risk to the downside is probably lying.

In recent years, passive investing has become a popular approach, allowing virtually every investor to participate in the stock market with an ETF index fund that tracks the S&P 500.

However, a purely passive approach cannot beat the market (because it basically is the market). That’s why Zacks Advantage offers an actively managed robo advisor that:

• Invests exclusively with ETFs
• Uses technology to recommend the appropriate mix of equities and bond ETFs to help achieve your investing goal and specific risk tolerance
• Lowers fees and expenses

Get our free guide, A Better Way Forward: Actively Managing Passive Index Funds ⁶, to learn the 4 issues that can hold back returns for passive investors, and how Zacks Advantage can help you overcome them.

Download our FREE Guide

*This rating was awarded by The Robo Report on 7/1/2023 in respect of the period 4/1/2023 to 6/30/2023. We do not compensate The Robo Report to obtain this rating. However, we pay compensation to the Robo Report to use their logo in connection with advertising this rating.

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¹ Washington Post. August 2, 2023.

² Pages. January 2023.

³ Zacks Investment Management may amend or rescind the A Better Way Forward: Actively Managing Passive Index Funds guide offer for any reason and at Zacks Investment Management’s discretion.

⁴ U.S. Securities and Exchange Commission. July 31, 2023.

⁵ Washington Post. June 10, 2022.

⁶ Zacks Investment Management may amend or rescind the A Better Way Forward: Actively Managing Passive Index Funds guide offer for any reason and at Zacks Investment Management’s discretion.

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