4 Types of Investments You Should Definitely Avoid (And What To Choose Instead)

Let’s face it – navigating today’s investment landscape feels like walking through a minefield blindfolded. With Wall Street constantly introducing fancy new products with flashy marketing, it’s becoming increasingly difficult to separate truly beneficial investments from expensive traps.

As someone who’s been analyzing investment strategies for years, I’ve seen too many people lose their hard-earned money on investments that promised the moon but delivered nothing but headaches and fees Today, I want to share with you the top 4 types of investments that financial experts consistently warn against

Why should you trust me? Well I’m not trying to sell you anything – quite the opposite! I want to help you AVOID wasting your money on products that primarily benefit the people selling them, not you as an investor.

So let’s dive into these financial landmines you should steer clear of.

The 4 Types of Investments to Avoid

1. Annuities

Annuities frequently top the list of investments financial advisors recommend avoiding. While there might be a few specific scenarios where annuities make sense, they’re generally problematic for several reasons:

• Excessive lockup periods: Your money gets trapped for many years. Ask yourself: “If this is such a great investment, why is my money restricted for so long?”

• High commissions and fees: Insurance companies pay massive commissions to agents and brokers who sell these products. Guess where that money comes from? Your investment returns!

• Complex structures: The most popular annuities typically offer a “guaranteed income benefit” that sounds amazing in the sales pitch. However, what’s often not properly disclosed are:

  • Total fees involved (they’re huge!)
  • Whether you lose dividends (usually you do!)
  • The crucial difference between the “benefit base” versus the “income base”

As Andrew Lokenauth from Be Fluent in Finance has noted, these products often fail to deliver on their promises while restricting your financial flexibility.

2. Structured Notes

These complicated products typically entice investors with a teased high interest rate at the beginning. But look beneath the surface and you’ll find:

• Hidden credit risk: You’re taking on the full credit risk of the issuer

• No principal guarantee: The “fine print” often outlines various scenarios where return of your full principal is not guaranteed when the note matures

• Extreme illiquidity: Trying to sell a structured note before maturity is nearly impossible without taking a loss

• Conflict of interest: In most cases, the only secondary market for a structured note is the issuer itself – talk about a stacked deck!

Structured notes represent one of those “too good to be true” investments that usually are exactly that – too good to be true.

3. Sector-Specific ETFs (Especially Those Based on Campaign Promises)

While not all ETFs are bad (many are excellent investments!), sector-specific ETFs based on political campaign promises or rhetoric can be particularly dangerous:

• Political hype rarely translates to profits: As Lokenauth pointed out, during Trump’s first term, many investors piled into energy ETFs thinking his pro-drilling stance would send oil stocks soaring. They were wrong — energy stocks stayed flat despite all the “drill, baby, drill” rhetoric.

• Narrow focus increases risk: Concentrating in one sector exposes you to unnecessary volatility

• Trend-chasing usually backfires: By the time a sector becomes “hot” enough to inspire a specialized ETF, the best opportunities may have already passed

For example, ESG (Environmental, Social and Governance) funds could face headwinds under certain administrations if environmental protections are reduced. During Trump’s first term, this sector reportedly dropped around 20% in the first year.

4. Complex Insurance Products (Like Indexed Universal Life Insurance)

Insurance and investments should be treated separately, but products like Indexed Universal Life Insurance (IUL) confusingly mix the two. Problems include:

• Blurred purpose: Insurance should protect against financial risks you can’t self-insure against. Mixing insurance with investments confuses this purpose.

• Adjustable cap limits: Issuers often have the freedom to adjust caps during the life of the contract – and these adjustments rarely favor the investor

• High fees buried in complexity: The complicated structure makes it difficult to understand how much you’re actually paying

• Limited liquidity: Like the other investments on this list, your money is typically tied up for long periods

Chinese stocks (especially tech stocks) also warrant caution according to some experts like Lokenauth, who notes the trade war rhetoric and tech restrictions create too much uncertainty. He reportedly lost about 15% on Chinese holdings during Trump’s first term before selling.

The Common Threads: Why These Investments Are Problematic

What do all four of these investment types have in common? Let’s break it down:

1. Your money gets locked up for extended periods, making it inaccessible even in emergencies

2. High fees and commissions that eat away at your returns

3. Excessive complexity that makes it difficult to understand what you’re actually buying

4. Aggressive marketing that focuses on potential benefits while downplaying significant risks

It’s not a coincidence that these problematic investments are often promoted at free dinner/lunch presentations. When there are substantial fees and commissions at stake, the marketing budgets expand accordingly. As NCM Capital Management pointedly asks: “How many expensive events have been offered to potential customers to discuss the benefits of investing in a daily, liquid, low-cost…..boring, yet highly efficient ETF?” Very few, because the commissions are much lower!

What You Should Consider Instead

So if these investments should be avoided, what should you consider instead? Here are some alternatives that typically offer better value for most investors:

1. Low-Cost Index ETFs

• Broad market exposure
• Minimal fees
• Daily liquidity
• Transparent pricing
• No lockup periods

2. Term Life Insurance (Separate From Investments)

• Lower premiums than whole life/universal life
• Clear purpose: protection, not investment
• Allows you to invest the difference elsewhere with better returns

3. Diversified Portfolio Approach

• Mix of stocks, bonds, and possibly real estate based on your time horizon
• No concentration in trendy sectors or political themes
• Regular rebalancing to maintain your risk profile

4. Direct Investments in Companies You Understand

• Individual stocks of businesses whose products/services you use and comprehend
• No layers of fees
• Complete liquidity
• Transparent ownership

Making Smarter Investment Decisions

To protect yourself from getting sold inappropriate investments, here are some guidelines:

Red Flags to Watch For

• Complex products you can’t explain to a friend in a few sentences
• Investments with lockup periods or surrender charges
• Products with high commissions for the salesperson
• Presentations that focus on “guaranteed” returns without clearly explaining risks
• Free dinner seminars (nothing is truly free – they’re paying for your meal because they expect to make much more from you)

Questions to Ask Before Investing

1. “What are the total fees, both upfront and ongoing?”
2. “What happens if I need to access this money in an emergency?”
3. “How is the person recommending this investment compensated?”
4. “Can you explain in simple terms how this investment makes money?”
5. “What are the specific risks I’m taking with this investment?”

If you don’t get clear, straightforward answers to these questions, walk away.

As NCM Capital Management wisely points out, if you want to prudently achieve financial independence, you’re typically best served by avoiding complicated, expensive products with long lockup periods. Instead, focus on investments that:

• Are priced daily
• Can be liquidated quickly when needed
• Have reasonable costs
• Give you complete freedom and flexibility

The financial world wants you to believe that successful investing requires complex products and expensive advice. In reality, some of the most successful investors have built wealth through relatively simple, low-cost approaches focused on the long term.

Remember, Wall Street has a vested interest in making investing seem more complicated than it needs to be. The more complex the product, the more fees they can justify. But your interests are different – you want growth, accessibility, and value.

By avoiding these four problematic investment types, you’re already ahead of many investors who get enticed by flashy marketing and unrealistic promises.

What investments have you found most beneficial in your financial journey? Have you had experiences with any of these investments to avoid? I’d love to hear your thoughts in the comments below!

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The riskiest types of investments include options, short selling, and certain cryptocurrencies and speculative penny stocks, due to their high volatility and potential for unlimited or total loss. Other very risky investments are those with high potential for loss, such as undeveloped land or speculative assets.