Identify the worst investments for individuals so you can stop investing in high risk stocks that are rife with conflicts of interest and speculation.

The investment industry offers a multitude of choices—far too many for anybody to be able to give deep consideration to each of them. We deal with this “information glut” by making few if any recommendations in segments of the investment universe that seem to us to have a flaw that can work against investor interests. This is just one example of some of the worst investments for individuals to make.

For example, we don’t recommend any investment plan or product that needs to succeed in stock options to make a good return for its investors. Of course, some options trades do pay off—after all, somebody has to win the lottery. But most options traders wind up losing money or, at best, making too small a return to justify their risk or cost of capital.

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Stop real profits from going to the investment firms and start keeping more in your pocket

The real profits in options go to investment firms that “make a market” in options—that is, they act as an intermediary between option buyers and option sellers, and make a sliver of profit on virtually every trade.

Some mutual funds and other investment products agree in general with our approach, but they don’t believe it applies to them. They feel they can enhance their returns by including options trading in their investment strategy. Often, they try to do so by investing in relatively low-risk stocks, and generating extra income by selling options on some of their holdings.

They think they can determine when it’s a good time to sell options on their holdings, or buy them back. That’s usually because they’ve studied stock-market and option-trading records and believe they have uncovered recurring patterns and rules that give them an enduring advantage over other options players.

Our view: any advantage their options research provides may linger for some indeterminate period, but will eventually disappear, perhaps abruptly.

There’s a large random element in short-term market trends. However, random events tend to occur in bunches. If your options trading system works, it probably means it’s generating a series of random results, and the options market is generating another series of random results that happen to match your trades closely enough to pay commissions and other costs, and still leave you with a profit. Any net gains are partly a matter of coincidence.

This is like betting on a lottery or a roulette wheel, based on recurring patterns. Lottery tickets and roulette plays are side bets on the outcome of random events. Our view is that the random element in short-term market trends, coupled with transaction costs and fees, tends to offset any long-term advantage you can achieve in the options market. (You can of course find recurring patterns in options and other forms of short-term trading, but they’re inconsistent. They only appear during periods of various lengths that lie within unpredictable start and end dates.)

Learn how to identify the worst investments for individuals to buy before they turn into serious and potentially disastrous conflicts of interest

One crucial element in succeeding as an investor is that you have to stay alert for conflicts of interest in the information and advice you receive. Conflicts of interest vary widely in the risk they expose you to. Some are huge—others, barely worth mentioning. Meanwhile, they are your greatest risks because they exist all around you.

Today, many investors looking for good investment ideas understand the conflicts of interest that brokers and other investment salespeople face when deciding what investments to sell to their clients. Brokers can sell a wide variety of investments; commissions and incentives vary widely as well. The general rule is that the commission on and incentives for a sale rise with additional risk—and/or costs for the investor.

We’ve been writing about conflicts of interest for decades. Still, many readers say it took them years to grasp the importance of the issue. So, we’ve decided to spend more time on it. Let us stress what we said earlier: conflicts of interest are the greatest single risk you face as an investor.

Our three-part Successful Investor approach helps you identify and avoid the worst investments for individuals to make

First, invest mainly in well-established companies. When the market goes into a lengthy downturn, these stocks generally keep paying their dividends, and they are among the first to recover when conditions improve.

Second, avoid or downplay stocks in the broker/media limelight. That limelight tends to raise investor expectations to excessive levels.

Third, spread your money out across most if not all of the five main economic sectors (Manufacturing & Industry; Resources & Commodities; Consumer; Finance; and Utilities). This helps you avoid excess exposure to any one segment of the market that is headed for trouble.

What are some of the worst investment experiences you have had?

What kinds of conflicts of interest have you seen in potential investments, and did they stop you from moving forward?