4 Tips on How to Avoid Bad Investments

Investments will not automatically bring you profit. You must know what catches to look out for and what clarifying questions to ask. Below are some tips to help you avoid bad investment scenarios.

  1. Be careful of investing in illiquid assets.

Some investments are easy to get into but a nightmare to get out of. These are called illiquid assets or security or assets with limited marketability. Examples of this investment type are real estate partnerships, private placements, private equity investments, and non-publicly traded REITs. There is simply not much trading volume. If you have too much money in illiquid investments, you may have trouble accessing your funds. The returns can be higher, sure, but the risks are infinitely higher, too.

  1. Diversify.

Anyone who tells you to put your money in one place is giving bad investment advice. Diversification is the key. Remember to spread your money out and do not put all your money into just one of these:

Annuities

Annuities ofer guarantees but investing everything in them, both taxable money and tax-deferred money, is counterintuitive since the fees are high and liquidity is limited.

REITs

A real estate investment trust is like a mutual fund that owns commercial or retail real estate. It is a great investment if done only as a small amount of your overall portfolio.

Tax-Deferred Accounts

Prioritize balancing your tax-deferred accounts, like an IRA or 401(k), and after-tax money. Withdrawals on tax-deferred accounts will hurt you.

  1. Understand your investments.

A good investment easily turns bad when you do not understand it. How else can you make sound financial decisions? If you are presented with a complicated opportunity, take the time to ask more questions or hire a professional to evaluate the investment. If you are still confused, walk away politely.

  1. Avoid investments with high upfront commission.

Simply put, your advisor has no incentive to provide ongoing service and education to you once the investment is final. Some examples are A share mutual funds, broker-sold annuities, and variable universal life insurance. Be very careful with these investments.

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