The internet is filled with advice on the best places to invest. Typically promoting some sort of mediocre offer, like low-yielding savings accounts. Honestly, if I see another “Top Investment Ideas” post with a savings account or a CD on the list, I will scream. So I thought why not lay them out in easy to digest format. Here is are some of my favorite top investments to avoid?
Remember, that a website or a person referring you to some of these offers will likely make more money from commissions than you will make by putting money in these accounts.
Well, this is no surprise. Savings Accounts take the #1 spot on my list of places NOT to store money. The reason is pretty simple too. Savings accounts don’t pay even remotely enough to cover inflation. In almost every case, your savings will decrease in “real” terms every single year. “Real” in the world of economics means after we take inflation into account. Here is a Wiki page on that, Real interest rate
Let’s take a look at these high yielding accounts. This is what comes up in Google if you search high-yielding savings account.
0.5% and a whole $125 if you put in $25,000. 25k. What does that translate to in these “real” terms if I take a look at the recent inflation rate in the United States?
And an article to accompany this insane chart. US consumer prices rise at fastest rate in nearly 40 years
So, in real terms, that means that your 0.5% savings account is going to lose anywhere from 2%-6.5% depending on how long the FED will hold their rates steady and not care about inflation as if it doesn’t erode your buying power. Let’s not get mad at the FED. I don’t need to use my Economics degree to predict that prices will continue rising in the foreseeable future and that 0.5% simply will not cut it.
Why do people still have savings accounts?
There is an argument that can be made that savings accounts are safe because funds are insured up to a certain amount, extremely liquid, and are great for the short-term.
Let’s say you have the maximum insured amount saved up but you need it for a downpayment in the next six months. Depending on where you are located, the maximum insured amounts differ, let’s say it is $100,000. At 0.5% you could potentially earn $250 over the period without risking liquidity.
Inflation in this case becomes an afterthought and frankly a theoretical concept. To us, $250 is still $250 in 6 months no matter what some inflation metric says.
Lending clubs were the hottest thing a few years back. If you had money to spare, you could lend it to your peers through these clubs and earn a percentage.
A few things are important to note that make these investments not worth it. These clubs are not banks so they don’t put the necessary resources behind verifying the creditworthiness of borrowers. And it is that way for a purpose, these are not traditional lenders so obviously we can’t expect them to deliver the same level of due diligence. You can also set the parameters yourself. For example, you can only pick customers with high credit scores. That said, as a lender you do take on more risk than necessary to make a stable income return.
So if a particular loan defaults, you lose whatever portion of your money went into that loan. Then there are the fees.
Investor Service & Collection Fees
Here is the summary directly from https://help.lendingclub.com/
Our investor service fee is one percent (1%) of the amount of any borrower payment received by the payment due date or during applicable grace periods. LendingClub will also charge investors a collection fee of up to 40% on all amounts collected on a delinquent loan (net of legal fees and expenses) to the extent any litigation has been initiated against the borrower, or up to 30% on all amounts collected on a delinquent loan in all cases not involving litigation.
Lending Club Rate of return
What is lending clubs’ average rate of return? From various sources & bloggers, the average is roughly 4-5% per year. This isn’t too bad but with the amount of risk and potential fees you may incur, you are better off setting up a dividend portfolio that will generate you 4-5% annually with much less risk.
Crowd investing platforms
I don’t mean crowdfunding platforms like Kickstarter, those are not really for investing. I mean crowd investing platforms that pull a little bit of money from a very large pool of investors to purchase an investment. These were supposed to be great, in theory, but in reality, they are fairly complex, riddled with fees and in many cases, classic alternatives provide better returns.
Crowd investing platforms are not all as beginner-friendly as they appear to be. In many cases, these platforms are only reserved for Accredited Investors. Here is the definition of accredited investors from SEC:
The SEC defines an accredited investor as either: an individual with gross income exceeding $200,000 in each of the two most recent years or joint income with a spouse or partner exceeding $300,000 for those years and a reasonable expectation of the same income level in the current year.
There are stipulations from accepting only accredited investors. Platforms that only accept accredited investors shift a lot of the risks onto investors. Idea is that accredited investors know what they are doing and the risks they are taking on. Reporting requirements for these platforms are also simpler if they only accept accredited investors.
However, not all platforms accept only accredited investors, many are open to everybody. Are those still not worth it? It depends.
In our Fundrise vs. REITs article, I outlined how Fundrise is basically a private REIT that doesn’t necessarily outperform many publicly traded REITs. So the question is, do you want to give your money to a platform where liquidity might be a problem or do you want to purchase an asset that you can sell any time with a click of a button?
Crowd investing can offer truly unique alternative assets
What crowd-investing can do is provide access to some truly unique alternative investment assets that are otherwise simply not accessible to the general public.
The question you have to ask: Am I fully invested in simple to understand, liquid assets, and do I need to diversify my portfolio into something unique?
If you are not a beginner and want some diversification then these platforms can offer something unique like:
Wine with Wine funding
Fine art with Masterworks
Web sites with Empire Flippers Capital
It is important to note that these investments by definition are riskier and less liquid.
Another one on the list of top investments to avoid may seem obvious for seasoned investors. One stock or one asset portfolios. Can’t truly call it a portfolio even. You see for beginners dabbling in investing, the temptation to go heavy or even “all-in” on one “great” investment can be so alluring.
I remember reading an article about a guy who put all his life savings into Tesla stock and became a multi-millionaire. Some big news channel covered the story, labeling the guy investing genius. In reality, he is an investing fool. People will say, who cares, he is richer than you now, that is what matters and that is true, but nobody ever mentions all the people that lost everything on [insert any other stock that failed]. See Selection bias.
We covered that in-depth in our article answering a simple question, Should I diversify? Truth is if you want to build wealth, you will have to concentrate on something with great intensity. Typically that applies to your business affairs and career. Nothing is stopping you from diversifying your personal investment portfolio. In fact it is crucial that you do.
Avoid hyped up stocks & asset classes (to an extent)
This one is harder to follow than it seems because hype surrounding an investment can be justified. Distinction that we have to make is whether we are buying because we think it is a great long-term investment or because we succumb to the hype machine.
How do you make that distinction? Look at business fundamentals.
There are a million examples of industries & companies that went through the ups and downs of being hyped up by the market and then brought down by business fundamentals. Most recent example would be the Cannabis industry. Five years ago it showed the greatest promise and some companies still do. There are great businesses that promise to deliver great products in an industry that got opened up by governments around the world. However, along those came all the fraudsters and simply poorly run companies that rode the hype train and were since brought down to earth. Here is just one example: CannTrust’s former CEO and two directors charged with fraud over unlicensed pot growing scandal
At the time of writing, Crypto and Electric Vehicle technology falls under this bucket. Both show great promise and revolutionary technology but with great future hopes, comes easy money. Nobody wants to miss out on the next Tesla or Bitcoin so money is pouring in from all over the world. Crowd funding platforms like Seed Invest, ETFs like ARKK, record breaking amounts from venture capital funds. Just look at the chart below
What percentage of that money will fall into failed companies? Hard to say, but it will be significant enough to bring a large number of these companies down.
What can we do about it? Due diligence and luck. For beginners, recommendation is always stick to the basics, Lazy Portfolios will give you everything you are looking for. For more seasoned investors, who do decide to invest in a hyped industry, due diligence will be crucial to get to the true value of these businesses. Then there is luck. Even great research won’t be able to withstand market forces, at least in the short-term.
Top investments to avoid today include poorly performing savings accounts, “innovative” platforms that aren’t necessarily better than their classic counterparts, one asset portfolios & many of the hyped up industries that along with great future potential carry large risks.