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5 Rules for Avoiding Bad Investments

You can avoid many bad investments by knowing what the “catches” you should avoid and look out for and you should know which clarifying questions to ask.

If there is a good investment there is of course a negative counterpart. That is why some investors have their investments advisors to guide them along the way.

Today we will be your investment advisor and we will help you avoid the bad investments by following these five simple rules:

Man Looking at a Storm in the Sea
Five Rules to avoid bad investments.
  • Avoid Investments with Short Marketability

There are investments that are easy to get out to, but there are some that aren’t easy to get out to. These are called “illiquid.”

Examples of these illiquid investments are non-publicly traded REITs real estate partnerships, private equity investments, private placements, and real estate partnerships.

I you have put too much money in non-liquid investments, you will have a hard time accessing your funds.

Some of these alternative-type investments may offer you high returns, you should always keep in mind that you might run the risk of losing all your investment.

You should diversify across asset classes and investment sectors and never put more than 15 percent of your money in these types of chances.

  • Avoid Putting All Your Money in the Same Investment

If someone said you should all put your money in any of the following investments the person is giving you the bad investment advice.

Any of these following investments can be a big part of your portfolio, just always remember that do not put all your money into just one of these following:

  • Annuities – Annuities may offer some guarantees that may be important to you. However, it is not wise to put all your money in this investment because of the high fees and limited liquidity.
  • Tax Deferred Accounts – You may want to build a balance between tax-deferred accounts and after tax-money. If all your money is only in tax-deferred accounts it may hurt you when you take out significant amounts and your taxes will be due.
  • Real Estate Investment Trust – REIT’s are great when it comes to investing but you should know that they only need to have a small portion of your overall portfolio.

If you don’t want to put all your money in just one investment, you could always choose to have a single financial advisor or a firm that could handle a variety of investments.

  • Avoid Investments with High Upfront Commissions Requirements

Investments that are charging you upfront commissions can be result into a bad investment for you. Since your advisor will have no incentive to offer ongoing service and education to you once the investment is final.

When you pay the upfront commission, there will be no additional incentive for the financial advisor to provide you an ongoing service.

Keep in mind that in this time there are a lot of ways to pay for the financial adviser and some do not involve paying commissions. There can be times where it will make sense to put out a small piece of your portfolio into investments that may require you a commission or transaction fee, but this should be minimal.

A good example for this is broker-sold annuities, “A” share mutual funds, and variabl;e universal life insurance as an investment.

  • Avoid Investments with Surrender Charges

Do you want to get out of an investment for a reason? Investments like broker sold annuities and B share mutual funds have a surrender charges which results to flexibility being limited.

Here are some examples for Investments that have a surrender charges that can cause you some problems along the way:

  • Divorce – Couples invested together, just to get divorce a few years later on. With that, the couples have two options: it’s either they pay high surrender charges just to get out of the joint investment or they could still invest together for six more years.
  • Moving – If you want to buy and move into a new house and you need money to put down until your old house sells. A situation like this could rise unexpectedly with employment changes. If your investment has surrender changes, you cannot take your money without paying what is often a heavy fee.
  • Health – Health can be expensive for you, your loved ones and for everyone for that matter. However, certain insurance-based investments with surrender charges may offer you limited penalty-free access to your money, but in a situation like this you want a full access to your funds.
  • Avoid Investment that Will Leave You Confused

You may found the good investment you are looking for but when you don’t know how it works it may turn into a bad investment.

In investment, when you are lacking with knowledge and understanding you will more likely to make a bad decision.

If the investment is confusing to you or do not understand it, just avoid the investment or do one of these three things:

  • Hire a professional to evaluate the investment for you.
  • Ask more questions about the investment.
  • Walk away respectfully.
Tree with Pennies and Dollars
By knowing the simple rules in avoiding bad investment, you will see the path to a great investment.

An investor has a 50-50 chance of being in a bad investment. You should always remember to follow the simple rules to know which investment is good for you.

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