Foolish Investment Strategies: Go for the Gold

June 7, 2014
Setu Mazumdar, MD, CFP

Having lost faith in the stock market after the 2008 financial crisis, one physician put all his money into a commodity trading advisor contract.

In my last article, I showed you an example of a foolish investment strategy physicians engage in: assuming low interest rates are for losers and going for too-good-to-be-believed interest rates. (Spoiler: they really were to good and a couple of physicians each lost half a million in a Ponzi scheme.)

Here’s another example of a real physician’s investments I reviewed recently.

Many investors lost faith in stocks after the 2008 financial crisis, and one physician I know decided that the stock market is “rigged,” so it’s better to own hard assets like gold and real estate rather than paper assets like stocks and bonds. So he came across a financial advisor who researches other advisors called commodity trading advisors (CTAs).

CTAs don’t actually buy commodities like gold and oil. Instead, they buy and sell futures contracts on those commodities and make a profit on price changes of those contracts. This physician invested his entire retirement portfolio in a CTA, not knowing they usually charge 2% of the value of your portfolio plus 20% of any gains—essentially they are hedge funds. But that hasn’t stopped investors from pouring hundreds of billions of dollars over the last several years into CTAs. Why? Because some of them have mustered up huge gains of 50% or more in a year.

So what’s the problem?

Studies have shown that over long periods of time, the returns of CTAs are nothing spectacular. But there are other bigger problems: lack of transparency, conflicts of interest, and the speculative nature of their bets.

Dumping your entire investment portfolio into this is pure recklessness. You may as well join me in Las Vegas and bet it all on red at the roulette table—at least we’ll get some free cocktails and maybe a buffet.