The rule of thumb with risky investment is that it cuts both ways. The present new opportunities for big gains but there is also the danger of being wiped out. It applies to all sorts of financial innovations, from derivatives to sub-prime mortgages.

The best way to deal with it is to understand the nature of the financial instruments, says Christopher C. Geczy, Wharton assistant professor of management. As reported in the Wharton@Work series, investors need to use six strategies:

Be cautious but not too cautious. Be careful, due your due dilgence but don't be too conservative.

Understand the risk This can be a hard one. But it pays to look at every potential outcome.

Consider the liquidity Too little liquidiy creates problems if things go pear-shaped. On the other hand, that might not be an issue for long-term investors.

Consider the leverage. Again, something that could be very important if things go off the rails.

Weigh the feesAre they actually worth the investment?

Look beyond the bells and whistlesLook for the real value and don't get sucked in just because it's new and sounds innovative. Many investors have come to grief when they failed to do that.