5 Bad Investment Ideas

How do you tell a good idea from a bad one? In my experience, there are a few indicators that may suggest a particular course of action is ill-advised.  A few examples would be:

  1. Anytime a friend dares you to do something, especially if it is a "Double Dog" dare.
  2. When someone says, “Hold my beer and watch this!”
  3. When something sounds too good to be true.

Other times, especially with investing decisions, it can be less obvious. While I could make this list much longer (and probably will in a future blog entry) the following five bad investment ideas are some of the most frequent I encounter. The good news is that while many have paid the price that these mistakes cost, many more of us can profit from the knowledge.

#5 – Buying a deferred annuity in a tax deferred account. One of the chief selling points for deferred annuities, both fixed and variable, is that the earnings are tax deferred. Through sucker (bonus) rates, riders, and even claims of protection from creditors, these confusing products are often sold in lieu of less expensive, less complicated, and equally creditor sheltered alternatives.

With retirement money, like in an IRA or 401(k), the tax deferral and creditor protection benefits already exists, with or without putting the money into an insurance product. It's like wearing a belt and suspenders. All of those other features, like death benefits and guaranteed withdrawal rates, virtually never justify the extra expense.

Some recent evidence that the insurance industry understands they are selling bad products are recent projections of fixed annuity sales dropping 30% after the Department of Labor’s new fiduciary rules governing retirement accounts go into effect. That's a pretty strong indicator that deferred annuities in retirement accounts benefit the insurance company more than the customer.

#4 – Chasing returns. “Past performance is no guarantee of future results”. So reads the disclaimer on virtually every piece of investment literature published today. It’s not just a cliché. Not only does last year’s top performer rarely repeat, the pattern of performance is unpredictable. Picking last year's winner with investments is only marginally more effective than picking last year's lottery winner. As the following illustration of returns from various asset classes over the last 15 years demonstrates, last year's winner rarely repeats and often fails miserably.


#3 – Trying to beat the market. There is a simple truth when it comes to investing, it is very hard to beat the market. When less that 1 out of 5 equity mutual funds (and less than 1 out of 10 bond funds) survived and beat their indexes for the 15 years ending in 2015, it’s pretty obvious that most of the people making money from active stock and bond pickers are the pickers.


#2 – Not investing. Saving and investing are not the same. According to a recent Fidelity Investments study, Millennials are saving more. The bad news, according to another study by T. Rowe Price, is that 25% of them are invested 100% in cash. Investing means taking some risk, but not investing is also risky. Take a look at the price of milk to see how not taking risk can virtually guarantee losing.


#1 – Not paying yourself first. The reasons for not saving and investing can be plentiful. Paying off debt, saving for college, or “got to have necessities” like cell phones and cable TV can all seem like reasonable priorities over saving for long term goals. But the reality is that interest rates are at all-time lows, college expenses can be managed in other ways, and many of today’s necessities are really just pretty expensive luxuries.

Paying yourself first is best accomplished with that first job by setting enough aside to maximize all of your retirement contributions before you become accustomed to spending it. If you haven’t already made that commitment, start today by setting something, anything, aside in a retirement account. Then, any increases in pay you receive going forward, put that into the retirement account until you are maxing it out.

With interest rates at all-time lows, long term investments in growth assets can provide the opportunity to earn more than the interest you are paying. The power of compound growth over time is truly one of life’s wonders, as demonstrated in this Accountable Update last April. It all starts by paying yourself first!