How ‘safe’ investments could destroy your portfolio

Regulators found that "broker-dealers may be recommending unsuitable transactions" that seniors don't understand. The most worrisome investments were in structured products, nontraded real estate investment trusts, variable annuities, and alternative investments including leverage- inverse ETFs. Investors, some over age 90, found their money locked up in these highly risky investments. They also ended up paying big fees, which ate up any income the products might have yielded.They're betting on overvalued investments. Pinning your retirement on just a few companies is risky enough. But the current state of the stock market adds to the risks: By historical valuation standards, U.S. stocks that pay a dividend are looking expensive, Hsu says. 

The Dow Jones U.S. Dividend 100 Index is up 181 percent over the past six years. Those prices reflect high expectations that could be dashed if profits or the economy stumble. If people are willing to invest in companies based outside the U.S., Hsu says, they can find companies paying healthy dividends at more reasonable valuations.

Municipal bonds — debt backed by cities, states, and other local governments — have also had a great run lately, with the S&P Municipal Bond Index returning 5.8 percent in the past year. Muni bonds can be tax-free, and that's made them popular after recent tax increases on wealthy Americans, says Marilyn Cohen, president and chief executive officer of Envision Capital Management. While Cohen thinks munis will keep doing well, she says investors need to diversify, spreading their exposure over bonds with shorter durations. They're taking risks.

Unfortunately, investors are drawn to the riskiest bonds because they also offer the biggest payouts. The riskiest muni bonds, for example, are issued by governments with fiscal trouble, including Chicago, Puerto Rico, and New Jersey, Cohen says. "You can tiptoe around those land mines."

High-yielding stocks, which Hsu calls "junk stocks," have the same risks. Dividend payouts at troubled companies may look generous, but there's a good chance those companies won't be able to keep paying them. "You're picking up a lot of risk," Hsu says.

Income investors may not be able to avoid risk entirely. With stocks at record highs and interest rates at record lows, it's harder and harder to find an income that's perfectly safe. To get the income they need, investors need to protect themselves by spreading their assets among as many income- producing investments as possible. And they should beware of any investment that promises a big payout — it's almost certainly too good to be true.