I was thinking the other day that while people often talk about the best investments out there, rarely do they talk about the worst investments you can make. It’s as if there is an assumption that everyone will magically know a bad investment when it appears. While common sense can go a long way in helping you avoid making a bad investment, doing your research and knowing which investments to avoid in the first place can help a lot. While this list isn’t comprehensive, it points out some of the worst investments that an average person can make.
Timeshare: Timeshares are often marketed as an investment because it’s a lot easier to sell something that appears to be something that will make you money than something where you’re going to lose lots of money. Unfortunately, a good salesman can make a connection that housing is a good investment and timeshares are kind of like housing and therefore a good investment even though this isn’t true at all. An investment is supposed to increase in value, yet timeshares typically lose 50% to 80% of their value the minute you sign on the dotted line.
Life Insurance: If you have talked with a life insurance agent, you’ve probably heard a pitch of life insurance as an investment. Again, insurance agents do so for a simple reason – it’s a lot easier to sell an “investment” than it is to sell something that is only collected upon if you die. Life insurance should be viewed and considered for purchase for exactly what it is – life insurance – and not as an investment.
Gambling: While this may seem obvious, there are a lot of people who gamble thinking that they are going to make money. The odds are against you no matter what you play. If you want to gamble as entertainment, that’s fine, but don’t consider it an investment of any kind.
Tips From Unknown Sources: They arrive in your email box again and again. Hot stock tips for various companies that are about to take off. Or maybe you overheard a conversation in am elevator about a hot tip. Investing tips that come from someone you don’t know will almost always be a terrible investment. Since you don’t know the source, you can never be sure of the claims being made. Base your investments on solid research, not something you overhear.
Investments You Don’t Fully Understand: Investing in anything that you don’t completely understand is a disaster waiting to happen. It’s not that the investment vehicle itself is necessarily bad, but if you don’t understand how it works, you don’t know when it’s time to hold and time to sell. You should always do thorough research before you invest in anything and know exactly how it works so you are prepared when decisions need to be made.
Jewelry: Sometimes jewelers will try to convince you that purchasing a bigger ring, a more expensive necklace or a higher quality stone will be a good investment. The fact is that the stones and jewelry purchased by the average person will lose value. Leave investment jewelry to the experts and purchase what you like for yourself, not as an investment.
Get Rich Quick, HYIP Programs, Etc: As the old saying goes, if it sounds too good to be true, it probably is. Many of these are based on small initial cash outlays hoping you will take the “well, it’s only a few bucks so why not give it a try” attitude. In the end, you’ll lose it all and that is 100% loss.
MLM Companies: Whether it’s advertised as multi-level marketing, network marketing or some other name, if you have to recruit others to make money, chances are you’re going to lose a lot in the process.
Cars: Okay, cars aren’t really an investment unless you’re looking at antique or classic cars which the average individual is not. However, purchasing more than you need in a car is a terrible waste of money. Unlike a house where if you buy bigger, it will often pay for itself in appreciation, the opposite will happen with a car. Purchase only what you need to get the most out of it. If you’re going to purchase one, go for a 2 to 3 year old resale to get the best value not only for the less expensive cost, but the lower insurance bills.
I’m sure that I have left out other terrible investments out there (and feel free to add to the list here), but knowing what to avoid when investing is just as important as knowing what is a good investment.