Worst Investments

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.

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13 Responses to Worst Investments

  1. Loi Tran says:

    Gambling can become an investment if you play the right game. Games where you have an edge against another player such as Poker(Texas Hold ’em, Omaha). There are some professional sports bettors and poker players that do that for a living. That is because they are playing against another person whose skill is lower than theirs. Professionals have discipline when they play.

    Does that mean people should gamble? Less than 1% of people can be successful at gambling, so I’d try to find something else.

    I think a lot of collectibles are bad investments also. Collectibles require a vast amount of knowledge about the item the person is buying and they are not very liquid as well.

  2. Retireat30 says:

    Great post. So often smart people get lured into “alternative” investments by dreams of insane returns.

    I think the most important point you made is: Don’t invest in things you don’t understand fully, especially if they are offering outstanding returns.

    That said, there is no better education than a little skin in the game. I’ve just lost $200 on an options deal that is eating into other great investments – but the education I got from losing that $200 is worth it.

    So, I guess a better statement is “Don’t invest MORE THAN YOU CAN AFFORD TO LOSE in things you don’t understand.”

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  5. Chester White says:

    On timeshares: Your advice is almost always correct, but I think possibly the Disney Vacation Club timeshares are an exception. Yes, you can buy them somewhat cheaper on the resale market than direct from Disney, but almost everyone who bought in since 1992 has made money upon resale, or only lost a few percent, while saving a bunch on their room stays.

    And you get bonuses and discounts of various kinds (like $100 off your annual passes).

    Investment tips and investing “programs” are worthless. If somebody really knew how to make 50% a year in the market:

    1. He wouldn’t tell you
    2. If he did tell you he’d charge you billions of dollars, and it would be worth it.
    3. He’d be sitting on a beach trading on his Blackberry for 5 minutes a day at most.

  6. Suresh says:

    You may be right about stones. But, concerning gold (22K+) and silver jewelry, it is a sensible store of wealth for people in developing countries that lack financial institutions with an FDIC-like safety net. Additionally, many developing countries have high inflation, and gold at least keeps up with inflation. In contrast, interest on money in the bank may not match the inflation rate, in which case the saver is losing money in real terms, albeit not in nominal terms.

    Putting aside the value of gold & silver as inflation hedges and stores of wealth, I believe we are in a commodities bull market now. So, gold and silver have significant potential as appreciating assets along with other commodities.

  7. mike says:

    Your comment on precious metals preserving value in some cases is true, but the way to achieve that is not jewelry. This is because the value of jewelry has both the value of the materials and the value of the time required to craft it. These people would be better trying to buy it in less labor intensive forms.

  8. derrik says:

    This kind of made me laugh because it should all be so obvious. I am always surprised at the “get rich fast” ideas.

    I can say that the average person that asks me about foreclosures and making money on that is the last person that should be thinking about investing in real estate. It just aint that easy.

  9. amy says:

    is there anyway for timeshares to become a good investment? I am looking at Westgate Resorts right now and I don’t know exactly what I should be looking for. Any suggestions to make this for out for me?

  10. pfadvice says:

    Is there anyway for timeshares to become a good investment? I am looking at Westgate Resorts right now and I don’t know exactly what I should be looking for. Any suggestions to make this for out for me?

    The simple answer is “No” – timeshares are not an investment and should never be viewed as one. Like a car, they are a depreciating asset. There may be other reasons to purchase a timeshare (although I highly recommend not doing so), but an investment is definitely not one of them.

  11. amy says:

    what kind of investment can a person who doesn’t much money and the best credit make? Is there any investment out there that the “little” people can make that can generate a decent return.

  12. True, viewing life insurance as an investment is incorrect. It does however have a place and can serve a great purpose in someones overall financial security if designed properly and with the right company. It can help stable a program that is weighed heavily in aggressive funds. To totally eliminate it as an option in your “financial health” is a mistake. I advise you speak to a professional before you make any decisions.

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