7 Investments To Avoid In Retirement

Throughout my 20+ years of working with clients, I have seen several examples of poor investments negatively impacting an individual’s or couple’s ability to save for retirement.  These investments were bought under the assumption that they would provide above average returns, but unfortunately had a negative impact on their long term success.  Therefore, my goal in writing this blog is to educate you on seven investment products that may carry more risk than you had thought.

Key Takeaways:

·       Is this life insurance product a waste of money? 

·       Don’t fall for false advertising

·       Why hedge funds aren’t worth the risk

·       Should you invest in crypto?

·       The dos and don’ts of annuities

·       You can’t win if you don’t play

·       Only trust the pros

Is this Life Insurance Product a Waste of Money?

The first investment product that I would like to cover is an investment in life insurance.  There are a lot of good reasons to purchase life insurance.  Term coverage is a great idea for individuals which you can learn more about in my podcast, 3 Ways to Determine How Much Life Insurance You Need.  Although, what we are covering (and want to avoid) is using life insurance as an investment.  This would involve purchasing a policy with a cash value component where your monthly or annual contributions are allowed to earn interest.  This is a selling point that agents at large life insurance companies use to sell these products. 

These salesmen will discuss how life insurance is the only investment not tied to the stock market that can deliver similar growth.  Realistically, you could earn 4-6% interest on the money on this life insurance investment which is decent.  However, there are a lot of high fees associated with life insurance which reduces the performance of the account significantly.  The life insurance contract is an agreement between you and the insurance company that states if you die the insurance company must pay your beneficiary a sum of money.  To reduce their risk (and to make money), the insurance company includes these fees so you must be aware of that.

You are better off putting the money into an investment account and purchasing stock or bond funds directly to avoid these layers of fees.  In addition, life insurance contracts typically have a 15 year surrender period.  Which means that you will be subject to a large penalty if you withdraw your money within that 15 year period.  Lastly, the salesman may claim that you can take the money out tax free so it will be like a tax-free loan.  Although you will have to pay interest on the money which reduces the benefit of doing so.  For these reasons, I would suggest that you avoid using life insurance as an investment as it could derail your progress towards a comfortable retirement.

Don’t Fall for False Advertising

The second investment that I want to discuss is private real estate deals.  This would include private real estate investment trusts (REIT) and private real estate deals with your friends, family, or a small company.  Fortunately, there are times where the deal works out.  However, the advertising these companies’ can be exaggerated and cause you to overpay for the property.   In the case of private real estate deals, there could be larger maintenance costs or vacancies which can significantly affect the performance of the investment.  Therefore, if you were to invest in real estate through these methods, the headaches would likely outweigh the benefits. 

Don’t get me wrong, I’m personally a fan of real estate.  Although, my preferred method is to buy a property that you can own and control.  If you are going to invest in a private real estate deal then I would suggest you do it with a large, reputable company that you have conducted your due diligence on.  This doesn’t ensure things will work out but working with a large company with many completed deals could provide more transparency. 

Why Hedge Funds Aren’t Worth the Risk

The third investment to avoid is hedge funds.  Over the years I have followed several hedge funds and they rarely live up to the hype.  There are only a handful of hedge funds that can produce consistent results which is why the average life of a hedge fund is five years and the rest fail.  The objective of a hedge fund is to hedge the risk of the market through their positions, options, or short-selling and outperform the overall market.  However, it’s difficult to determine when the market will go up and down which is why few survive.

Over the long run, most hedge funds fail to beat a simple index such as the S&P 500.  Enough so, that Warren Buffet made a bet that he would pay any hedge fund owner $1,000,000 if they could beat the return of the S&P 500 each year over a ten year period.  I don’t think anyone was successful in beating his challenge which shows why hedge funds are a risky investment.  On top of that, there have been mutual funds created to replicate a traditional hedge fund strategy called long/short and most have performed poorly.  Therefore, I would prefer to see you create a diversified portfolio using ETF’s or mutual funds, and bonds rather than wasting money investing in hedge funds.

Should You Invest in Crypto?

The fourth investment is cryptocurrency which is a speculative and controversial topic.  If you are unfamiliar with cryptocurrency, the largest cryptocurrencies are Bitcoin and Ethereum.  There are thousands of other cryptocurrencies available consisting of altcoins and stable coins.  Altcoins are any other crypto than Bitcoin which was the first cryptocurrency.  Stable coins on the other hand attempt to peg their market value to some external reference such as the US dollar or gold resulting in less volatility.  You should interpret the levels of risk as altcoins, bitcoin, and then stable value coins starting with the riskiest cryptocurrency. 

Currently, several altcoins are down more than 85% from their all-time highs. Bitcoin is down about 67% and stable coins have held their value besides a few failed projects like LUNA.  Hearing these drawdowns, you should understand why cryptocurrency can be detrimental to your retirement savings.  Another negative to investing in cryptocurrency is that they are difficult to hold.  None of the large custodians like TD Ameritrade or Fidelity allow you to trade or hold cryptocurrency which forces you to use sole-crypto custodians such as Coinbase.  The issue with Coinbase is that the platform charges a high commission on every trade of about 1.5%.  This commission is extremely high, especially when you consider that all the largest custodians charge zero dollars to buy or sell stocks on their platforms. 

The Dos and Don’ts of Annuities

The fifth investment that I believe you should avoid is variable annuities.  I am not a fan of annuities, but I believe that you can do okay with a fixed or indexed annuity.  Variable annuities on the other hand have high fees that can get up to 4% of the amount of money you have invested each year.  There are low cost variable annuities that are subject to fees around 1.5% per year, but they are still high and will significantly reduce your performance each year.  Therefore, if you’re in a variable annuity then I would recommend looking at both the performance and what you paid in fees in the past few years.

If the performance has not been good, then I would suggest you get out of it.  I have had several clients bring me their investment statements where I see a variable annuity that they have held for many year with little to no growth.  To contrast, an index fund would have provided a significant return. Therefore, make sure that you subtract all fees from the performance of the annuity to find the net annual gain on your annuity.  If you are happy with the performance, then you could continue to hold it.  However, if you are unhappy, then it could make sense to take the charge and surrender the annuity.  At that point, you can open an account with TD Ameritrade or Fidelity and invest in ETFs or mutual funds that track an index like the S&P 500.  

You Can’t Win if you Don’t Play

The sixth investment that you should avoid is the lottery.  We all know the saying “you can’t win if you don’t play,” but the lottery is not an investment.  Therefore, I would recommend against putting your money into the lottery.  If you were to take that money and invest it into low cost index funds, then you’d be able to make a significant amount of money over the long term.  To contrast, you could get lucky and hit the lottery, but the odds are against you and that “investment” will likely go to 0.

I’m not saying that you shouldn’t put some money towards the Powerball with some friends or coworkers.  The thing that we want to avoid is consistent lottery purchases because the amounts lost over time could have accrued interest and increased your retirement savings.  For those who don’t want to invest the money, I would suggest that you spend it on yourself whether it be an elegant dinner out or a vacation.  It would be better to enjoy spending your money rather than putting it towards the lottery and losing it without any utility.  

Only Trust the Pros

The last investment to avoid are those given by your friends, coworkers, internet gurus, and family.  Most of these individuals are not professionals and have done limited research on the investment discussed.  People tend to follow tips like this blindly because they believe they’ve been given a great opportunity to invest in the stock “early.”  However, most of the time the investment does not pay off and loses money in the long run. 

If you have already invested in a losing stock that was suggested to you then it’s time for action.  First, do some research on it to see if you believe in the company and its future success.  If you have lost faith in the stock and do not foresee a comeback, then it may be time to cut your losses.  This is especially true if the underlying investment is highly volatile because your goal from here should be capital conservation.  There’s no reason to hold the position until it goes to zero as you can reinvest the money into a time-tested approach such as investing in index funds.  If you prefer to buy individual stocks, then my recommendation would be to hold at least 25 different positions spread across different sectors to ensure you are well diversified.   

I hope that you were able to take something from this blog about the seven investments that you should avoid in retirement.  You must remember, this money needs to last throughout retirement, which can be over 40 years.  It would be unfortunate to find yourself in a situation where you need to return to work at age 75 because you gambled your money away on poor investments.  If you need assistance in planning for retirement or building an investment portfolio, then follow this link to set up a free consultation where we can review your retirement needs and goals.