Bad Investments: 9 Mistakes You Must Avoid
There are plenty of bad investments out there just waiting for you to step into them.
They’re like bear traps – once you’ve triggered the trap, it’s devastating. The investment world can be a nearly literal minefield for the unwary and unwatchful, but there’s good news.
No Plan for Your Investments Leads to Bad Investments
Investing without a plan is folly. You need to know where you’re going and how you intend to get there, as well as the specific milestones you need to see between Point A and Point Z that will tell you that you’re actually progressing toward your goal. And your goal needs to be less nebulous than “financial freedom”.
We all want to be financially free, but what does that mean to you? Write your plan down.
Be methodical. Be disciplined. And, remember that hot tips, rumors, and conjecture don’t make sound investing methods.
Lack of Diversification
You’ve heard this one before, but for all that, it’s one of the most common mistakes made.Without diversification, you’ll start making bad investments by keeping your capital in just one area.
However, understand that there’s a right and wrong way to diversify. Make sure that you’re limiting the number of investments in your basket with a similar level of risk.
The risk level is more important than the investment type.
For instance, you might put two very different investment types into your basket, thinking that because they are different, they’ll hedge you against loss.
The problem is that because they have the same or a similar risk level, you haven’t hedged yourself at all. You’ve actually doubled down on the chance that your money will be wiped out.
A Focus on Historical Returns Creates Bad Investments
Sure, you can and should look at historical performance before you put your money into a particular investment, but that’s not the whole story. The future can be very different from historical performance (either better or worse).
A lot of advisers like to tout the “average” return on the Dow Jones Industrial Average as 10%, but that’s far from the truth. In“Fooled by Randomness”, author Nassim
Taleb points out that the actual average from 1900 to 2002 was just 7.2%. Only five years saw a return higher than 5%.So, take any claims of high returns historically with more than a grain of salt (perhaps a whole salt shaker).
Tailor Your Style to Your Personal Goals
This one ties directly into creating a plan for your investing, and it relates to where you want to go.
Make sure that your investing style correlates with your goals, or you could wind up making bad investments.
Remember that there is no such thing as a one-size-fits-all approach to investing. Your methods and style should be as individual as your goals.
Avoid Leveraged ETFs
Sure, leveraged ETFs were very popular not that long ago. However, popularity doesn’t prevent bad investments.
Today, leveraged ETFs are at the top of the list of things that you should avoid. The main reason for this is that these tools are really designed for day traders, and will change values throughout any given day.
These are not long-term investment options and have no place in the average investor’s portfolio.
Watch Your Housing Costs
Real estate is a great investment unless it’s not. Buyers taking out huge loans for homes beyond their means was fuel in the fire of the Great Recession and you should learn from the mistakes of the past.
Avoid buying more home than you can actually afford. And make no mistake, that affordability goes beyond the sticker price. You’ll need to plan for things like maintenance, property taxes, insurance and the like, and they will all drive up your costs.
Don’t end up being one of the tens of thousands of homeowners thinking about cashing in their retirement fund to pay off a home they can no longer afford.
Run from Commodities and Currency Futures
When it comes to bad investments, commodities and currency futures also top the list. Why is that?
Simply put, they are leveraged. They tempt you into thinking that you can win big very quickly, but the truth is that you end up losing even more quickly.
Leave these to the day traders and focus on long-term wealth building instead.
Tax-Deferred IRA Annuities Should Be Avoided
Yes, IRAs can be great ways to build your wealth over time. However, tax-deferred IRA annuities don’t make good investment options. Why is this?
IRAs are tax deferred by nature. Adding a tax deferred annuity into your IRA makes very little sense and offers no actual benefits.
In fact, you’ll really just end up paying more and lining someone else’s pocket instead of yours.
Avoid Following “Experts” Too Closely
Everyone’s a guru these days. Everyone has some hot new trick that’s just guaranteed to make your wealth building activities go that much faster. Here’s the thing – how many of those so-called experts are actually living the good life?
The Internet makes it all too easy to make it seem like you have wealth when you’re really living in a studio apartment eating Spaghetti-Os out of a can with a plastic spoon.
Moreover, every one of those experts is actually interested in making money off your money. That’s true from investment institution to brokers.
So, their advice is tailored to make sure you give your money to them so that they can build their own wealth. Always look at investment advice from experts with a critical eye and never take any of it at face value.
Cynical? Yes. Accurate? Yes.
There you have them – nine mistakes that can lead to bad investments and even put you in dire financial straits. Avoid them at all costs.