Five ‘Investments’ to Avoid

There are numerous investments out there, ranging from the common ones like stocks, bonds, and mutual funds to much more exotic vehicles like collateralized debt obligations and master limited partnerships. Most of these vehicles have advantages that make them useful investments, at least under certain circumstances.

But there are other ‘investments’ which are, simply put, bad. They have few good points, and those are more than overwhelmed by the negatives involved.  Given the wealth of more profitable, easier to understand investment opportunities, there’s really no good reason to put your money in any of the following:

1) Gold Bullion – Investing in gold is a losing proposition; the price of gold historically just keeps up with inflation over the long-term, and gold doesn’t pay dividends while you’re holding it. Owning physical gold only increases the problems, as you have to worry about theft, misplacing the gold, and reselling the bullion when you want to take your profits. For most people, the better option is simply to use mutual funds or ETFs if you want exposure to gold.

2) Collectibles – Collectibles cover a wide range of different objects, from comic books and baseball cards to art and vintage wine. Collecting something you’re passionate about can be a good hobby, but don’t expect to make a killing from your stamp collection.  You have to consider the markups when purchasing quality collectibles, the costs of keeping your collection in pristine condition (card protectors, comic book covers, a temperature controlled wine cellar, etc.), and simple deterioration over time.  Furthermore, unless you have expert knowledge on how to examine and evaluate the subjects in your collection, there is the possibility that you will end up purchasing a flawed or fraudulent item. If you like a particular type of collectible, by all means, buy them if you have the money to spend, but don’t consider them investments.

3) Penny Stocks – Penny stocks are low cost (below $5), highly speculative securities, as noted by the SEC.  They are typically traded on over-the-counter, largely unregulated exchanges, like the Pink Sheets or the OTC Bulletin Board. The SEC requires that the firm issuing penny stocks must submit a form to the potential investor that they might lose their entire investment.

One big problem with penny stocks is the low prices and limited number of outstanding shares make them vulnerable to manipulation. A con artist can buy most of the outstanding shares, tout the stock repeatedly, and sell off the shares to unsuspecting investors who think they are getting unbiased advice. It’s a textbook example of a pump-and-dump investing scheme, building up a worthless stock and then leaving other people holding overvalued paper.

4) Timeshares – Basically, timeshares are arrangements where you pay for the use of a piece of real estate for a limited period of time (typically in one week increments), as well as a share of the maintenance and other costs associated with the property. The problems with timeshares include the high annual fees, the heavy pressure tactics used at the timeshare sales, and the low resale values. Furthermore, the cost for one week in a timeshare greatly exceeds 1/52th the cost of purchasing a similar property outright. If you want to own a timeshare, the best way to do so is to find someone who wants to sell their timeshare and buy it used; you can avoid many of the pitfalls listed above, and will still end up with the same timeshare you would get at retail price.

5) Anything You Don’t Understand – Not so much a specific investment as a general warning: if you invest in things you don’t understand, there’s a much greater chance you will make a bad decision and put your money at risk. If something sounds too good to be true, if you can’t decipher the paperwork and explanations you are given, or if someone attempts to get your money while saying, ‘trust me, this is a sure thing’, you will undoubtedly be in much better shape by saving your money and putting it into a simple investment, like an index fund.

Stay away from these investments and do proper due diligence on any investments you do utilize, and your investment path will be much smoother.

2 Responses to Five ‘Investments’ to Avoid

  1. I could agree with collectibles if #5 is true, too (you don’t understand them).

    I used to sell things on eBay for a guy in high school. He collected stamps, coins, and miscellaneous other things.

    He earned $100,000/year PROFIT just by doing that.

    So the money is there if you know what you are doing.

    • Fair points, MLR. Of the four examples I have listed (besides the ‘anything you don’t understand’), collectibles are probably the ones with the most potential of being turned into a legitimate money-maker, at least by someone with the proper knowledge and connections. There IS money to be made, especially if you act as a dealer to other collectors (as your friend did). The comments about it not being an investment were directed at anyone who thinks that a shoebox full of baseball cards in his basement could double as a retirement fund. Making money off collectibles requires expertise in order to properly evaluate your purchases and determine reasonable selling prices, which I alluded to in my original post.

      All of that said, kudos to your friend on his success!

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