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.
By the way, I recognize that a few of these assets have narrow, legitimate uses, especially for extremely high-net-worth individuals — but most don’t. Enjoy!
High-expense mutual funds & ETFs
In terms of money lost, the biggest bad investments are:
- Actively managed mutual funds (yes, they are worse than passive funds)
- High-expense funds (that is, those with expense ratios greater than 0.25%)
- Any mutual fund with a “load”
- And other investment vehicles with high fees:
- Private/alternative investment platforms marketed to retail investors
- Peer-to-peer lending platforms
Why am I down on these? Well, because for any actively managed or high-expense fund, you can now find a low-cost, index ETF or mutual fund that will perform similarly for much lower annual expense.
As a rule of thumb, you can now get anything you want at an expense ratio of 0.10% or less, though some funds suitable for particular retirement strategies might be worth going a little higher.
Real investments with poor diversification
These investments are insufficiently diversified and really unnecessary for most long-term investors:
- Industry sector funds
- Individual foreign country stock or bond funds
- Thematic funds (“flavor-of-the-month” ETFs and the like — you already missed the wave)
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!
Annuities and other bad insurance or insurance-like products
These products have hurt so many of my friends that it makes me legitimately angry.
These are all products that are sold, not bought, because they are so hard to understand. 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 even 8 percent! That’s all money taken off the top of your investment, and these companies use early withdrawal penalties to prevent you from getting your money back before they’ve sufficiently sucked you dry to pay those commissions.
- Annuities (yes, nearly all of them)
- High admin fees, high surrender charges, poor investment choices, and opaque terms make them public enemy #1
- Especially avoid: variable annuities
- Especially avoid: index annuities
- Remember: Social Security or TIPS ladders are better than any annuity you can buy
- 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.
- High admin fees, high surrender charges, poor investment choices, and opaque terms make them public enemy #1
- Any life insurance with a savings or investment component
- Especially “whole” or “universal” life insurance
- Cash-value life insurance
- Any investment with an insurance component
- Buffered ETFs (or defined outcome ETFs, managed risk ETFs, floor ETFs… the marketing never ends)
- Structured notes
- Or just any product that calls itself “structured” or “buffered”
- Anything with various danger signs
- A “surrender period” or other early withdrawal penalties
- Investment choices with expense ratios over 0.25% (ratios of 0.50-0.80% are typical)
- High annual administration fees
- Mortality & expense risk charges
- Annuitization schedules that don’t pay back until you are 105
- Pages and pages of disclosures
- Contracts that you can’t understand (or explain to your mom) after reading the contract
If you already own one of these, first, sorry to hear that. I recommend that you talk to a fee-only fiduciary advisor before unwinding any of these, especially insurance products with surrender periods and significant multi-year tax implications.
If you are even considering buying one of these overpriced and exploitative investment vehicles, don’t do it before creating a fully fleshed-out retirement plan with a fee-only fiduciary advisor. Be very clear about what your goals and expectations are before you inflict this upon yourself.
Gambling disguised as investing
More than ever there are a huge number of volatile, investment-shaped instruments that hurt a lot of smart people. When I worked in financial services, we used to sell them hard because the commissions or embedded fees were very high. Sometimes you don’t even see the fees because they are easily hidden in the sale price or bid/ask spread.
- Money-losing trading habits
- Day trading (most day traders lose money and most of the rest earn less than minimum wage)
- Margin trading
- Gamified trading apps
- AI-driven automated trading
- High volatility assets
- Any ETFs with gambling-like aspects:
- Leveraged ETFs
- Inverse ETFs
- Short ETFs
- Penny stocks
- Any ETFs with gambling-like aspects:
- Derivatives
- Options (especially: binary options)
- Commodities
- Futures
- Foreign exchange (“forex”) anything (most retail forex traders lose all their money even faster than day traders, usually in less than a month)
- Crypto and anything “on the blockchain”
- Cryptocurrencies (all of them: Bitcoin, altcoins, stablecoins)
- Crypto staking platforms offering fixed returns (surprise: they eventually don’t)
- “Digital assets” like non-fungible tokens (NFTs)
- Untested companies
- Early IPOs
- Equity crowdfunding platforms
- Any company that has to use a SPAC to go public
- Other weird stuff
- Life settlements/viatical settlements
- Litigation finance platforms
Most people will do better at a roulette wheel with triple zeros than any of these. In the short run, you might win; in the long run, you will inevitably lose.
I do recognize there are legitimate reasons for covered call options if you are hedging large, unavoidably concentrated stock positions or RSUs. But I’d also say that very few people are trading options for this purpose.
Gambling disguised as fun
Only 3% of gamblers on prediction markets win consistently. The majority of winnings in these markets go to “whales” with faster computers than you, and secondly to the house, which keeps its commission no matter who wins. Sorry, Charlie.
- Sports betting
- Prediction markets
- Online gambling
- Heck, traditional gambling too (in the long run, the house always wins)
As they say, if you can’t spot the sucker in your first half-hour at the table, then you are the sucker. Since this is the Internet, you are definitely the sucker.
Assets that fail most people, sometimes badly
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 value, don’t beat inflation, or are impossible to sell when you actually need the money. What unites them all is that they aren’t real investments because they don’t generate cash flow and rely on a “bigger fool” to bail you out.
- Precious metals or coins (including gold ETFs)
- Gold IRAs (and other precious metal IRAs)
- “Collectibles,” antiques or art
- Fractional art/wine/whatever ownership platforms
- Luxury goods
Real estate that isn’t really an investment
Your primary home usually isn’t an investment — it’s a place to live that happens to appreciate. And some other specific real estate products are usually losers:
- Timeshares and vacation “fractional ownership” (you already can’t sell these — ask anyone who’s tried)
- Timeshare exit/resale scams too!
- Non-traded REITs (illiquid, high fees, and priced by the sponsor, not the market)
- Second/vacation homes bought partly “as an investment” (the math never works and maintenance eats you alive)
- Real estate crowdfunding platforms (high fees, no liquidity, and you’re last to know when the deal goes bad)
- Home equity investments
- Farmland or timber investment funds
And in some high-cost-of-living locations, it isn’t worth even buying a home. Better to rent if you need mobility and flexibility.
Any investment product sold with these red flags
- Guaranteed high returns (9%+ annually) with “essentially” zero risk
- High pressure sales
- High urgency to act quickly
- Elon Musk
- Complex, confusing money making structures
- Financial schemes that “they don’t want you to know about”
- Crypto anything
- Blockchain anything
- Admonitions not to “get permission from your wife”
- Needing to download an app from a company you’ve never heard of
- High ongoing fees (anything above 0.1% is unnecessary, anything above 1% is terrible)
- Unclear, hidden fees (somebody is always getting paid)
- Celebrity or influencer co-investors (who probably don’t exist anyway)
- Celebrity or influencer promotion
- Things recommended by a person you “met” online
- Super Bowl ads
- Powerpoint over steak dinners
Magical money machines and other scams
These should all be illegal, and would be if we had a better government:
- Multilevel marketing (it’s just a slow pyramid scheme)
- “Investing” courses & masterminds sold with ROI promises (good for gurus, bad for you)
- Merchant cash advance syndicates
- Privately placed promissory notes
- Vending machine/ATM “investment opportunities”
- Structured settlement factoring
- 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)
- Memestocks (just another pump and dump that people inflict on themselves)
Real investments & habits that I look askance upon
Finally, there are a few completely legitimate investments that I prefer my friends not load up on, because they generally aren’t compensated for their volatility relative to diversified index funds:
- Individual stocks in nearly any quantity (unless you are Aswath Damodaran)
- Rule of thumb: if you don’t know the company and what it makes from the ticker symbol, you shouldn’t own it
- Avoidable overconcentration in your employer’s stock
- Small cap funds in disproportionate quantities (10%+ of a portfolio)
- REIT funds in disproportionate quantities (10%+)
- High-yield (junk) bonds in any quantity (bond-like returns for stock-like risk)
- Tax-managed/direct indexing accounts (high expense and leaves you with disastrous complexity in future years)
I don’t begrudge friends with “fun money” who play the stock market like going to Vegas. Just keep it under 5% of your portfolio. How about 1%? That’s even better.
Why do we fall for bad investments?
Investing well is like farming: it’s slow and, for some people, boring. Greed and boredom get the better of people, and salespeople take advantage of that.
On the other hand, even good assets like stock & bond index funds have risk and volatility. This is normal but can be kind of scary in a downturn. Fear and anxiety are also easy for salespeople to exploit.
So 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.