Think twice about betting on Wall Street's 'fear gauge'

Wall Street's rocky ride in 2018 — a level of chaos we have not seen in quite some time — has everyday investors fearing for their 401(k)s.

But many times, panic can drive you into pretty risky deals. The same applies to rushing into something you don't understand because your neighbor has a convincing story on a hot new way to make money.

Ever hear someone you know try to chat you up on the wonders of trading the VIX?

The Financial Industry Regulatory Authority is warning that novice investors could lose more money than they might expect if they trade complex, speculative products that are designed to cash in on the market's volatility.

Investors who have complained to FINRA say they have lost six figures on exchange-traded products that track "volatility" as an asset.

"One caller we had heard from really lost everything," said Gerri Walsh, senior vice president of investor education at FINRA.

The investor put virtually all of his family's assets on a volatility bet.

The investor bought the product on margin — essentially investing with borrowed money.

The investment crashed, his money was gone and he owed so much that he faces the possibility of having to mortgage his house to pay off the margin debt. The specific VIX-related product he bought no longer even trades.

We're not talking about your typical stocks and bonds. The products are not buy-and-hold investments — and can be fairly volatile themselves.

Typically, investors are tracking futures products or other derivatives pegged to a so-called "fear index."

"You're taking a significant risk and you need to understand that," Walsh said. "There's always risk involved with these products."

Others say some brokers pushed the product, too. Investigations into some aspects involving the VIX benchmark may be forthcoming.

Yet, as David Kudla, CEO for Mainstay Capital Management in Michigan, said: "They are certainly not intended, even by their advocates, as the sole asset in a portfolio, or as the destination to park one's life savings."