Bull & Bear's SMARTS

      Marlys Harris: "Who would pass up a no-risk investment with a guaranteed high rate of return? You would, or course, because you know such deals are too good to be true.
Well, maybe not. Every year since the dawn of time, plenty of intelligent people lose money to shady schemes. And when the deals are pitched by someone you already know, they may be hard to resist. To find out what to watch out for, we queried state securities regulators. Here are two you should turn down - and some legitimate alternatives.
      • Oil-drilling deals that come up dry. "People figure with gas prices around $2 a gallon, somebody's making money, and they can too," says Alabama Securities Commissioner Joe Borg. Con artists are touting new drilling technology that supposedly allows prospectors to redrill and drain old oil lines in the U.S. and overseas. The come-on looks plausible; after all, legitimate oil- and gas-drilling programs do exist, and isn't technology always improving?
       The alternative: If you want a piece of oil profits, look into a mutual fund specializing in energy. The Vanguard Energy Fund (VGENX), for example, provided its investors with a total return of 3.13 percent in the year ending May 17, 2004. Over the last five years, its annual return was 13.8 percent.
      • Promissory notes that go flat. Investors seeking above-market interest rates can fall prey to scammers offering "guaranteed" promissory notes or IOUs that supposedly return 15 to 20 percent or more a year. The money may be said to go into any number of investments, from real-estate projects to start-up companies.
      The Securities and Exchange Commission and state regulators have taken action against dozens of such scams over the past few years. Generally the deal is a Potemkin village, and the con artists use investors' money to finance lavish personal expenses. In fact, legitimate promissory notes are marketed to corporations and not to the general public.
      The alternative: If you want to add real estate to your portfolio, you could buy the house next door and rent it out. Or you could invest in a real-estate mutual fund or a Real Estate Investment Trust (REIT), a pool or properties sold on the stock market. But limit your investment to a small portion of your portfolio because rising interest rates generally hurt real estate, and rates are up. As of May 17, real-estate funds had lost 4.8 percent this year, and REITs 5.4 percent. Still, over the long term, both investments could be promising. In the last five years real-estate funds returned 11.4 percent a year, and REITs 12.7 percent."