The Unlucky 13: Bad Investments for Your Retirement
While we would all like to find a shortcut to massive wealth, the steady approach is probably the best route to a secure retirement. Save early and regularly and invest surely.
You probably know someone who knows someone who won the lottery, bought a Picasso at a garage sale or who invested on the ground floor in an amazingly successful company. However, those stories are the exception, not the rule.
The following comes to us from Mr. Henry K. “Bud” Hebeler. Bud has been working with retirees for many years, developed special material for their use, and given numerous seminars on retirement. His current focus is dissemination of sound financial planning information that applies to a wide range of personal investment, economic and income situations.
Bud has learned a lot of bad investments lessons from both his own and associates’ experiences.
Here are 13 bad investments to potentially avoid:
1. Livestock and Commodities — No “Moo”ney and Very Complex
When I was a kid, my father had a bad experience with an investment to raise animals. He told me frequently, “Don’t invest in anything that eats.” One of my business associates told me his worst experience was investing in cattle and said he wished he had heard my father’s words. I took my father’s advice when approached by a friend who had a great sales pitch and wanted some seed money for a catfish farm. It and his fish went belly-up, one in the water and the other in bankruptcy.
Another business associate got involved with options trading and speculated in eggs. He was at the end of the chain of trades and ended up with a boxcar full of eggs that he had to distribute. Once I met with a member of the Chicago Board of Exchange. His advice was, “Don’t invest in commodities. I can make money from fees on every trade, but it’s very unlikely for the novice.” Of course there was the exception and scandal when the wife of a famous politician invested $10,000 in cattle futures and, with the “help” of a political supporter, turned those option contracts into $100,000.
On the lighter side, my wife and her friends bought hundreds of Beanie Babies jokingly speculating on their future price. She and her friends still laugh about it, but the Beanie Babies wait in a chest for our great grandchildren. More seriously, an eye doctor of mine was an expert in ancient armor. I believe he actually may have been successful at that, but he left the country to avoid a large number of malpractice suits. Investing in valuables from diamonds to art requires real expertise and very close ties with buyers.
I personally have been in about a dozen of these, lost money on many, and was very fortunate to make up for the losses with one of them. Tax returns are much more complicated, especially with some oil and gas ventures. I still have a real estate partnership that I have great difficulty selling. It makes a good return but does not fit in at all with our estate plans. And I haven’t been able to get the general partner to sell after almost 40 years. Stick with public investments where the market prices are posted and you can easily sell a part.
4. Complicated Investment Contracts
The small print often exceeds the large print and explains how you are the responsible party. By reading carefully, you’ll find how the seller makes its money. You likely have seen some get-rich-quick ads on TV or financial articles written by shills of the company. READ the small print whether it be a life insurance product, specialized annuity, reverse mortgage or any other investment contract. “Ever upwards, never downwards” or “Convert your …..” should warn of caution. Don’t understand the small print? See a CFP.
5. Specialized Funds
You are making a big bet that you know what will happen in the future when you pick funds specializing in a market sector. I had a lot of experience trying to predict the future as Boeing’s officer responsible for its strategic planning for six years. Stick with broad based index funds. Over the long haul you’ll do better and feel more comfortable. The major components of those specialized funds are likely components of the indexes anyway.
When Boeing had its big crash and Seattle was going down with it, there was a large billboard that said, “Will the last person out of Seattle please turn off the lights.” I was appointed by the governor to be on his Economic Development Council to join with a number of bank officers to try and promote some new businesses. Most of the choices we made were marginal at best and the one that most of the members thought had the least chance turned out best. You need lots of money to succeed in this and really know what you are doing.
7. Portfolios of Individual Stocks
When I was a young man and before I had a CFP help me with investments, I took the advice of a stock broker and from several financial magazines with sure winner stock picks. I did horribly.
8. Real Estate: Flip or Flop?
I know a number of people who have done extraordinarily well in various kinds of real estate, but that is their full time job. They are good at it and are able to get low interest financing.
Flipping houses has proved to be a disaster for most that try often ending with bills they cannot afford. Stick with low-cost diversified Real Estate Investment Trusts (REITs) index funds which have a daily market value and you can sell a small part when needed.
9. Time Shares
Vacation properties that offer points or certain periods of time are better considered as life-style purchases rather than “investments.” They presuppose that you have the ability to know their use often a year in advance and that you will use them for many years.
They are difficult to sell and carry annual charges. Heirs often do not like their obligations.
10. Illiquid Investments
Always consider if investments are “liquid.” These are purchases that have a published market value and generally are divisible so that you can sell only a part. Antiques, art, collectibles, time shares, most partnerships and real estate are not liquid and make poor investments for those who are not otherwise wealthy. Think carefully about considering the total value of your home as a retirement investment.
11. Crystal Balls — Don’t Try to Predict the Future
There is good reason that economic pundits finish their pitch with something like “On the other hand ….”
Even this Grandpa here can’t see the future and knows that predicting when the markets will fall or grow is futile. I was lucky in many respects for our long stretch of personal investment successes and the six years I was responsible for Boeing’s strategic planning to determine where the company should best spend its money. Further I was well connected in the economic, academic, business and government worlds and was paid to know what was happening. Still, all that would not guarantee that I would be right.
12. Free Advice
And, most certainly do not listen to the financial advice from TV ads, long internet infomercials, your beautician or drinking buddies. Authentic sounding financial and media pundits can be just as bad. I read numerous financial publications and have written articles in them as well.
13. Lottery Tickets
There is no harm in spending $1 or more on a lottery ticket so long as you know that it is for entertainment, not investment purposes.
What Should You Invest in for Retirement?
The best advice comes from Warren Buffet, stick with low-cost broad based index funds.
An index fund is a type of mutual fund. Each index fund has a set of strict rules about the types of stocks in the fund and how they will be traded. When you buy an index fund, you are getting broad market exposure at a relatively low cost.
People like Warren Buffett and other index fund managers have expert staffs that can do due diligence with personal visits to the many components of a company. You don’t.
If you want a do it yourself approach, then be sure to select information sources carefully. Know something about how the author earns money. In fact, know a LOT about that. Authors with good material are John Bogle, Jonathan Clements, and Larry Swedroe. You might even read mine, most of which are in the What’s New section of Analyze Now.
You should also invest time. Spend time figuring out what you want to do in retirement with your carefully invested savings. And, spend time creating and maintaining a complete retirement plan that insures you have the means to achieve your goals.
The NewRetirement retirement planner is a detailed and personalized tool that makes it easy to track, update and improve your retirement over time. You can even do what if scenarios with investment returns.