Investing is a financial habit that practically every expert recommends, and there are plenty of options available. Unfortunately, some of these investments aren’t good places to put your money. If you don’t know what to watch out for, you could make a mistake based on poor advice from someone you know or a salesperson looking to make money off of you.
Former financial advisor Humphrey Yang provides a lot of useful investing advice on his social media channels. He recently shared his opinion on the four worst investments, and you should definitely avoid them at all costs.
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1. Whole life insurance
Whole life insurance often gets marketed as an investment as well as a life insurance policy. As you pay premiums, your policy accumulates a cash value, and you’re eventually able to borrow against that or make withdrawals. But there are a few major drawbacks:
- Your return on investment with a whole life policy is low. The average annual return is about 1.5%, according to Consumer Reports. The average stock market return, on the other hand, is about 10% per year before inflation.
- Whole life premiums are extremely expensive. When comparing whole life and term life, whole life often costs 10 to 20 times more.
The reason whole life insurance gets touted as an investment so much is because insurance salespeople earn juicy commissions when they sign you up. Instead of wasting money on this, stick to term life for life insurance and invest all the money you save on premiums.
2. Triple leveraged funds
A triple leveraged fund is a type of exchange-traded fund (ETF). They leverage debt to increase their positions, effectively tripling returns — and losses. If the ETF gains 1%, your triple leveraged fund gains 3%. If it loses 1%, your fund loses 3%.
While these can work out, you’re taking on quite a bit of risk. Yang also brings up a good point that during volatile markets, even if the ETF breaks even, you could still lose money on your triple leveraged fund. That’s because when the fund drops in value, it takes a much larger gain to break even on the loss. The top stock brokers offer plenty of normal ETFs with competitive returns and without the risk that comes from using leverage.
3. A savings account with an average APY
As interest rates have risen, the gap between typical big bank savings accounts and online savings accounts has gotten wider and wider. Case in point, the average savings account APY nationwide is just 0.37%. Many of the best online savings accounts offer 4% or higher.
With such a huge difference in rates, it doesn’t make sense to put your money in an average savings account. There’s no risk to online banks. All the good ones carry the same FDIC insurance as any other bank, which covers up to $250,000 per bank, per depositor if there’s a bank failure.
If you’re not sure how much interest your savings account earns, make sure to check. If you’re not getting at least 3%, it’s probably time to switch to one with a more competitive APY.
4. Loaded mutual funds
A loaded mutual fund comes with an upfront fee paid to the financial advisor who selected the fund for you. Yang says that if you hold the investment for a very long time, then the returns could make it worthwhile, but that this type of investment doesn’t make sense for most people.
Fees like these are one of the biggest factors that affect your investing returns. Yang’s correct that loaded mutual funds don’t make sense for most investors. You can find plenty of quality mutual funds on your own that will get you competitive returns without excessive fees.
All the investments Yang mentioned are popular financial products, so it’s good to know about them and why they’re not the right place to put your money. As far as where you should invest, low-cost ETFs and mutual funds are excellent choices, particularly those that invest in the S&P 500 or the entire stock market. Another option is to pick stocks and build your own portfolio. Whatever you choose, the key is to do plenty of research on investments first so you can see if they’re legit before committing your hard-earned money.
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