As a former financial services marketer, I sold a lot of people on investments or investing behavior that were bad for them in a variety of ways. Now, as a friend trying to help other friends make good investing choices, I made a list of investments (or things that look like investments) that you should avoid or never buy. Enjoy!
Real investments with poor diversification
These investments are not well diversified and really unnecessary for most long-term investors:
- Individual stocks (no matter whom you know in the company)
- Industry sector funds
- Individual foreign country stock markets
What works instead? Highly diversified, low-cost index funds like VTI, VXUS, and BND with expense ratios below 0.05%. Yes, that’s only 5% of a single percentage point!
High-expense mutual funds & ETFs
Whatever you find here, you can find a low-cost, index ETF or mutual fund that will perform similarly for much lower expense.
- Actively managed mutual funds (yes, all of them)
- High-expense funds (that is, with expense ratios greater than 0.20%)
Bad mutual funds & ETFs
Some funds have so many pitfalls or potential losses that no normal investor should ever touch them.
- Any mutual fund with a “load”
- Any ETFs with gambling aspects:
- Leveraged or buffered ETFs
- Inverse ETFs
- Short ETFs
Bad insurance or insurance-like products
These products have hurt so many of my friends that I think that most of them should be illegal. These are all products that are sold, not bought, because they are so hard to understand and companies would be sued if what salesmen said were recorded and played back at trial. And they are indeed sold because commissions are huge: 6 percent or more! That’s all money taken off the top of your investment.
- Any life insurance with an investment component
- Especially “whole” or “universal” life insurance
- Any investment with an insurance component
- Especially any product that calls itself “structured” or “buffered”
- Annuities
- Remember: Social Security or TIPS ladders are better than any commercial annuity
- Especially avoid: variable annuities
- Especially avoid: index annuities
- A few legitimate, low-cost annuities (or things with annuity in the name) called SPIAs & MYGAs have their place for very risk-averse individuals. Everything else is hot garbage.
- Anything with a “surrender period”
- Anything with pages and pages of disclosures
- Anything you can’t understand after reading the contract
Gambling disguised as investing
These instruments hurt a lot of smart people. We used to sell them hard because the commissions were high. Sometimes you don’t see the commissions because they are easily hidden in the sale price.
- Early IPOs
- Day trading
- Margin trading
- Crypto
- “Digital assets” like EFTs
- Penny stocks
- Options, covered calls, or other derivatives
- Commodities
- Futures
- Foreign exchange or currency futures
Assets that badly fail most people
People will point out that some people do OK with these, or they provide diversification. But for most people across most of time, they lose or don’t beat inflation. What unites them all is that they aren’t real investments because they don’t generate income.
- Metals or coins (including gold ETFs)
- Timeshares
- “Collectibles,” antiques or art
- Luxury goods
Supposed money machines and other scams
These should all be illegal, and would be if we had a better government:
- Anything offering high returns (10%+ annually) with “essentially” zero risk
- Anything where expenses are unclear or hidden
- Multilevel marketing (see pyramid schemes — no matter how “early” you think you are)
- Merchant cash advance syndicates
- Pyramid schemes (no matter how “high in the pyramid” you think you are)
- Ponzi schemes (no matter how “early” you think you are)
- Pump and dump schemes (no matter how “early” you think you are)
Investing well is almost “agricultural.” It’s slow and, for some people, boring. Good assets like stock & bond index funds also have volatility, which is normal but can be kind of scary.
If you have assets, you will be surrounded by people seeking to make money from your understandable desire for more growth (greed!) or more safety (fear!). Remember that 99% of financial information (by volume) is designed to make money for somebody — and it’s not for you.
DISCLAIMER: I am not a financial advisor and this article is not financial, legal or tax advice. This article is for educational and entertainment purposes only. All investing involves risk and your investment and other financial decisions are solely your responsibility. Past performance does not assure future results. You should do your own research and seek independent professional advice for guidance for your own personal circumstances. I am not affiliated with any of the companies or products listed, nor do I earn any compensation for the links contained here.