While I am an investment and tax professional, I’m also a small business man and a bit of an aficianado of great marketing. But while I can admire great marketing, I only admire truthful marketing. No matter what the investment markets are doing there are always people/companies trying to take advantage of the current trend to sell you their product or service. Nothing wrong with this, it’s the American way.
The trouble is, the current trend doesn’t always last and when the tide shifts the people who bought in to the opportunity often find themselves holding yesterday’s product today, and it will cost them big time to get out of yesterday’s opportunity by taking investment losses, or penalties and fees or both. While none of the opportunities are bad in and of themselves, their timing is questionable at best. After all, the proper time to get into any opportunity is to buy in at the bottom and take advantage of the appreciation, in the case of fixed rate of return vehicles, such as bonds, you want to buy in when the rates are high and the next move is down. Buying into an appreciating asset when it is peaking, is near peaking, or has already peaked, or buying a fixed rate product when the rates have declined yet not reached a bottom, is usually not a good decision. Below are 4 examples to be wary of.
1. FIXED ANNUITIES/CDs/SAVINGS ACCOUNTS AND MONEY MARKETS
I will say up front that you are not going to lose your principle from market risk in fixed annuities and CDs. Both are usually marketed heavily in volatile times such as these because their fixed rate of return is appealing in times when investments like stocks are getting pummeled with losses. But while they are great for the time being, please remember that rates are very low and the government is printing money like crazy and the only thing backing this money is the fact that the government has the power to tax its people (you and I!). Please also remember that when times change and the economy goes back on the upswing, there will be a lot of money in the system that wasn’t there before thus making those dollars worth less. This will result in two inevitable outcomes: One, inflation will run rampant, thus the everyday goods and services we all use will cost more.
Two, in order to curb the aforementioned inflation, the Fed will have to raise rates to stop inflation from spiraling out of control. If the liquid cash portion of your portfolio is in vehicles such as bank accounts or money markets, you should be OK as you’ll be able to move money out of the market at will, and the rates paid on these vehicles will move upward (albeit slower than inflation in most cases) at the same time. If you are in a time investment like a CD or fixed annuity, taking money out early can cost you for the early withdrawal, and it would really stink to be invested in at 3 percent when the Fed jacks up rates in the 5 or 6 percent range as you’ll be making half the rate of inflation. While having some money in these fixed rate vehicles at all times makes sense, don’t over commit to investment vehicles that will penalize you for early withdrawal in a time of low interest rates where the next move interest rates make will inevitably be up.
2. GOLD, SILVER, AND PRECIOUS METALS
Whenever the crap hits the fan, the “gold bugs” come out in full force, and while they aren’t completely wrong, you might want to read on before you take too big of a position in gold. Having an allocation in precious metals at all times is a good idea, say maybe 5 or 10 percent of your overall portfolio, but not much more than that. The great thing about gold and other metals is that when the economy “heads south”, the value of precious metals usually “heads north,” they are typically a non-correlated asset class as compared to stocks, bonds and real estate. The bad thing about gold is that once the economy turns back around again, gold heads downward, often times quite sharply and can stay there for a long time.
Gold was not a good place to be heavily invested in the great bull run of 1982-2000 because except for a couple of dips, the stock investors cleaned everyone’s clocks, plus they received dividends during the dips, and that is another bad side to gold. With gold, the only thing thing one can rely on is potential price appreciation, while stock investors will receive dividends and bond investors will receive income as well as potential appreciation. The aforementioned point is a HUGE reason I prefer my stock and bond allocations be greater than my gold/metals allocation. The final thing that SOME gold and metals aficiandos try to sell is that the current economic downturn is different and that America as we know it is going to collapse, so stock up on gold, food, guns and ammunition because you’re going to need it when anarchy reigns supreme. To that I say, America has survived many depressions, recessions, wars, race disturbances, and terrorist attacks and still found a way to bounce back and the current crisis will be the same. Keep focused on disciplined investing and don’t worry about purchasing an AK-47 and ammo unless you happen to be a gun collector and need one for your collection.
3. STOCK AND DAY TRADING SYSTEMS
Remember 10 years ago when it could be reasonably argued that a monkey could throw darts at the local newspaper’s stock page and make money? During the heady days of a bull market any thing seems possible. Down days on the market are seen merely as opportunities to buy in. I think everyone reading this can relate to this scenario, and also the fact that when good times hit the stock “system” opportunists come out with as much gusto as the fixed income and gold bugs do during the bad times. Hotel conference rooms are rented in every major city so the guru du jour can tell you about his/her can’t miss system to make untold millions. Heck, you can even quit your job and make more money daytrading than working.
While I’m sure some people CAN do this and make a good living at it, these people are the exception and not the rule. There’s a saying that we have in the investment industry that goes something like this: “Never confuse brains with a bull market.” I believe this saying fits this scenario perfectly. I have two questions that I’d love to ask these gurus. The first question is, why do you only show up when we are in the midst of a bull market in stocks? Most people want to know what to do when things are not so good. How does your system work then? Unfortunately, the geniuses with the “can’t fail” systems seem to be MIA whenever the bear market hits. Don’t believe me? How many commercials have you seen for these systems lately as opposed to 1999 or 2004? Not many I’m willing to bet. I know haven’t seen any. Question number 2, if your system was that awesome you should be making enough money to live a more than comfortable lifestyle, why do you need to sell your system for several hundred dollars a crack? Stock analysis takes technical knowledge and a lot of time doing research, most big institutions hire people to do this as a full time job, and even that might not work. Time and time again it’s proven that investing in a diversified portfolio of passive indexes trumps the “experts” the great majority of the time. If you do choose to go this route, at the very least you should be prepared to do similar research yourself. Which leads me to the final class of opportunists….
4. REAL ESTATE
If you’ve never seen an advertisement for a system selling you on how you can become rich with real estate, you must be living in a cave somewhere in the south pacific with no TV. These are especially prevalent now that the real estate bubble has popped. Foreclosure experts have the stage now, though the “flippers” and “fixer uppers” are still on the scene, just not as plentiful as they once were. Just like stocks, I will never tell you that you can’t do something (can’t is a four-letter word in my book), just don’t be misled into thinking that you can learn to be Donald Trump with little or no effort of your own, or that 0% down/100% financing deals are waiting for you around every corner. For the “systems” guys I’d ask one of the same questions as the stock gurus, if your system was that great you shouldn’t you be making more than enough money, and be busy enough, that you wouldn’t have to buy infomercial time to sell your system to the general public?
The people that I know that are successful investing in non-security real estate have done, and continue to do a lot of research in and on their chosen markets. Many are tradesmen and/or have friends that are tradesmen(carpenters, plumbers, electricians, dry-wallers, or jacks of all trades) that way they don’t get gouged in labor costs. You might also want to know a thing or two about landlord/tenant rights in your state and area because, despite what the gurus might tell you, not everybody pays their rent, pays it on time, and takes care of their (really your) place. Can you learn to do all of these things, absolutely! Will you, I don’t know, will you? Be honest with yourself because after you start putting up your money is NOT the time to decide to get bored with the project.
If you have trouble understanding the intricacies of your 401k/mutual fund/brokerage statement, you will not have much fun calculating cash-on-cash return formulas, and cap rates. Real estate is definitely a part of a well diversified investment portfolio, but if you don’t want to deal with “the 3 T’s (Toilets, Tenants, and Trash)” investing in one the real estate ETFs (Exchange Traded Funds) will allow you to get exposure to real estate at a reasonable cost, just like investing in a stock index ETF will allow you to get exposure to the stock market. If you want to go it alone in your local market, do your homework. Remember, “The Donald” learned a lot about real estate from his father, Fred Trump, and he started learning from a very early age. Robert Kiyosaki (Rich Dad Poor Dad) did the same only he learned off his friend’s father. Neither learned off a late night guru.
Well now that I’ve identified the “four horsemen of the financial apocalypse”, I’d like to conclude by saying that investing your hard earned money is a simple and boring process for the great majority of people. Invest in a properly diversified portfolio of non-correlating asset classes while being mindful what your risk tolerance and investment time horizon is. If you require more excitement, go rent the movie “Wall Street” for a night or two and PRETEND you’re Gordon Gekko.