Part of being a good investor is knowing which investments aren’t going to perform. I’ve compiled a list of bad investment opportunities, and I hope you’ll help me by adding any others you can think of in the comments below:
9 Bad Investment Opportunities
- Cars – Consumption rarely makes for a good investment, and cars have to be one of the worst investments anyone could make. Even those who approach cars with investing in mind find it difficult to squeeze out a positive return after including all carrying costs like insurance and basic maintenance.
- Work-at-home gigs – At any point you pay to work for someone else, you’re the reason they’re making money. You wouldn’t pay good money to work in a corporate office; there’s no reason you should have to pay to work at home, either. Some legitimate companies…say, Scentsy or Thirty One do require an investment, but remember, it’s more work than it is investing. You’ll have to put in the time to make it a success.
- Your broker’s commission – It’s cool to tell your friends you have a stockbroker at your next outing, but make sure you’re getting what you pay for. Mutual funds with sales loads are making your broker a whole lot of money at your expense. Investing in advice is smart; investing in a salesman’s new sweet sports car isn’t. (Sidebar: some brokers know people love hiring them. One told Barron’s he “tells them things they can brag about.”)
- Pyramid schemes – “Simply send five people a $5 bill, make 200 copies of a new letter, and spend $90 on postage to soon retire in the Bahama’s from a flurry of money containing envelopes!” Not so fast – the only one who gets rich from a pyramid scheme or chain letter are mailing list salesmen and your postal delivery worker. Besides, these are illegal.
- Stock promoters’ stock picks – Not a week goes by that I don’t get a really nice letter in the mail telling me about a great stock market opportunity. It’s flashy, full-color, and usually has the face of a familiar name telling me about how rich I’ll be if I buy the next soft drink company or junior gold miner. Before buying any investment you hear about, see who’s doing the selling. The fine print should disclose how much the promoter was paid – and how he or she was paid – to pitch you that hot stock. Here’s something to remember: if a company needed investors and could make a good case for an investment, it wouldn’t be targeting average Joe Blows like you and me.
- More real estate than you can afford – Real estate makes for a great investment, but the house you live in is all consumption. Getting exposure in cash-flowing real estate is much different than owning a 3,000 square foot home when you’d be just as happy in a 2,000 square foot home. (See an article on real estate vs. stocks.)
- Taxable DRIPs – Investors should rightfully enjoy dividends, but there’s no reason to pay extra taxes. Before participating in a DRIP, check to see if its tax-advantaged. Given the proliferation of online brokerage accounts and broker-sponsored DRIPs in IRAs or 401ks, keeping your dividend payers in a tax-advantaged account is as easy as ever.
- Degrees from for-profit colleges – The value of a college degree can be debated endlessly, but the value of a degree from a for-profit college cannot. For-profit schools lack reputation and occasionally accrediation, cost more than public and private schools, and have fallen behind in job placement. Take the traditional route; find an accredited school with a name that is trusted and a track record that you can be confident in at a price you can afford.
- IPOs – Being a hipster isn’t so cool when it comes to Wall Street. While there are plenty of successful IPOs, there are plenty of failures, too. The only IPOs one should consider are those in which the business has a track record; too many lack a track record long enough to deem them worthy of an investment.
These are all the bad investment opportunities I could think of. Can you think of any that I’ve missed?