You can avoid some of the biggest investing mistakes by knowing what to look for. Many mistakes can be avoided by using these 5 simple rules.
1. Avoid Investments With Surrender Charges
Investments with surrender charges may turn out to be bad investments because they limit flexibility. Some examples are: Broker sold annuities and B share mutual funds.
Markets and economic conditions are constantly changing. It’s important to have flexibility, especially as you get older. A bad investment is one that that locks up your money for long periods of time. Investments that have surrender charges have caused problems in all of the following situations:
- Divorce: Couples invested jointly, only to divorce a few years later. They had two options: pay high surrender charges to get out of their joint investment or suck it up and stay invested together for six more years.
- Moving: Suppose you want to buy a new house and need funds to put down until your old house sells? But you can’t access your money unless you pay a surrender charge.
- Health: Health costs for you or loved ones can be expensive. Although investments may offer limited penalty free access to your money, you don’t want to have your hands tied when in this situation.
2. Be Cautious Of Illiquid Investments
Illiquid investments are not necessarily bad investments, but you should be cautious. If you have too much money in illiquid investments it can limit flexibility. Some examples are real estate partnerships, private placements, private equity investments, non-publicly traded REITs .
Illiquid investments may offer higher returns. The trade off: you cannot easily cash them in.
Illiquid means that although you will not pay a penalty to get out of them, it may take months, or years, to cash in your interest in the investment. After investigating, the investment may be solid; just make sure you only put a small portion (less than 15% of the total value of your financial assets) in an illiquid investment.
3. Be Wary of Investments That Pay Upfront Commissions
Investments that pay upfront commissions can turn out to be bad investments because your advisor has no incentive to provide ongoing service and education to you once the investment is in place. Some examples are: A share mutual funds, broker sold annuities, variable life insurance as an investment.
When you pay an upfront commission, there is no incentive for the financial advisor, or financial planner, to provide ongoing service to you.
The exception to this is real estate. A realtor has no ongoing obligation to service your property, so paying a commission on a real estate transaction makes sense. Their job is to find you the right property.
With an investment advisor, however, you will need ongoing service. There can be times where it may make sense to put a small piece of your portfolio into an investment that pays a commission, but only a small piece.
4. Avoid Investments That You Don’t Understand
A good investment can turn into a bad investment when you don’t understand how it works. When you lack understanding or knowledge, you’re more likely to make an illogical decision.
If it sounds complicated, or you just don’t understand the investment, do one of two things.
- Ask more questions. (If someone isn’t able to provide plain English answers, then walk away.)
- Or, just walk away.
5. Don’t Put All Your Money in the Same Type of Investment
Anyone who recommends you put ALL of your money in any of the following investments is giving you bad investment advice.
- Annuities – Annuities can offer guarantees that may be important to you. However, if someone recommends you put all your money, both taxable money and tax deferred money (such as IRA accounts), into annuities, this is not wise.
- REIT’s – A REIT is a Real Estate Investment Trust, like a mutual fund that owns real estate, usually commercial or retail real estate. Some REIT’s are great investments. However, when I see a client who has put their entire IRA account, for example, into a single REIT, this is not a wise move.
- Tax Deferred Accounts – You want to build a balance between tax deferred accounts (such as IRA or 401k accounts) and after tax money. If all your money is in tax deferred accounts, it can come back to hurt you.
It’s OK To Put All Your Money With:
- The same reputable mutual fund company, such as Vanguard or Fidelity.
- The same reputable qualified financial advisor, if they use a diversified portfolio of investments for you.
- The same brokerage firm, such as Charles Schwab or TD Ameritrade, as long as your money is diversified across different types of investments inside that account.
Read more: http://www.everythingaboutinvestment.com/2011/12/5-rules-to-help-you-avoid-making-bad.html#ixzz29m8fsjPX