9/24/2013 5:45 PM ET|
9 'hot' investments you don't need
The financial industry is good at pushing investors to take more risks or gamble on things like penny stocks and gold. Fact is, you don’t need tricks to make money or even get rich.
Financial media is great at telling investors what they need right now. There are economic data points and headlines you need to read, stocks you need to buy or sell, newsletters you need to subscribe to, and investing icons you need to imitate.
A lot of these needs are legitimate, and it's a good idea to address them. But it would be naïve to think that all of them are necessary to your success.
There are plenty of manufactured "needs" out there that are simply ways for financial firms or media outlets to make a buck, at your expense, and your portfolio will be the worse for it.
So I figured it would be helpful to focus instead on some things that the vast majority of investors don't need -- and probably never will.
1. Outperformance: Consider that simply by buying a Standard & Poor's 500 Index ($INX) fund 10 years ago, you could have doubled your money when you count dividends. And consider that even if you bought at the dot-com peak in 2000 you would have gained almost 50% including dividends. Even if you'd bought the top in 2007 you'd have roughly 30% total returns.
What's so bad about a roughly 5% annual return in the midst of a horrific global downturn? While greed is a part of the equation, the real problem is a practical one where most Americans start saving too late for retirement and need big gains to catch up. If you set realistic goals and plan ahead, you can -- and should -- avoid the big risks associated with a drive for dramatic outperformance.
2. Gold: Gold has no fundamentals and has no use, either in the global economy or in your portfolio. The closest purpose that can be ascribed to gold is as an inflation hedge, which still doesn't make gold a necessity. If capital preservation is important, then investment-grade bonds that yield more than the rate of inflation will suffice. And if you're after gains, then gold is only better than stocks if you cherry-pick favorable periods when the precious metal was in favor and ignore the rest of the data. So if gold isn't lower risk than bonds and can't deliver the returns of stocks, why bother?
3. Funds of funds: For those unfamiliar, a fund of funds is a mutual fund that is comprised of other mutual funds. Why pay fees to a money manager who shuffles your investment to other money managers? The pitch for funds of funds is that these instruments help investors diversify and can adjust asset allocations over time so you don't have to. But the fees are typically higher, since they involve multiple funds, all of which want a cut. A made-to-order strategy almost always trumps the one-size-fits-all approach. You'll gain flexibility and cut out costs by focusing on individual funds.
4. Leveraged ETFs: Sure, you can make it rich betting right on a fund like Direxion Daily S&P 500 Bear 3X ETF (SPXS), which goes up three times as fast as the market goes down. But it's a bet -- pure and simple. And because leveraged ETFs have high fees and are focused on leveraged returns only within a given trading days, they have super-short shelf lives and thus are only a tool for highly active day-traders who are comfortable with high risky speculation.
5. Tax fixation: Yes, it's better to pay long-term capital gains tax than short-term gains. And yes, tax-loss harvesting can save real money in certain situations. But the bottom line is that you should buy investments you expect to go up, and sell investments you think will start to decline. Your retirement planning over the long-term should always take precedent over a single year's tax paperwork.
6. 'Black-box' systems: There's no secret formula out there that always works. If there was, then why don't the biggest shops on Wall Street use one? After all, 63% of large-cap fund managers underperformed their benchmark last year. And while it's silly to believe such a system exists, it's naïve to think that YOU, for a LIMITED TIME ONLY, can access this strategy for just $99 A MONTH! Here's a good rule of thumb: if someone claims to have a foolproof way to pick winners, won't tell you the screening process and wants you to pay for access, then their specialty is marketing, not capital markets.
7. Penny stocks: A lot of money can be made in penny stock investments, but this shadowy corner of the stock market is rife with fraud and ruined portfolios. Case in point: An August bust involving a $140 million fraud scheme that spanned as many as 35 countries.
Some penny stocks literally have zero revenue and will ultimately never record a cent in sales. Even if you find a microcap penny stock that isn't a complete scam, the best you can hope for is a super volatile investment that moves on sentiment alone. They are simply too risky to meddle with.
8. Stop losses: For starters, long-term investors shouldn't be paying attention to day-to-day gyrations. But even for those with shorter time horizons, stop-losses can be counterproductive. Remember, a stop loss triggers a market order once the stock breaks below a certain level -- so if you put a stop at $40 but your investment opens at $10, the order gets filled at $10. A better course, especially in this high-tech era, is to have price alerts sent to you via email or a smartphone app. Then you can assess the situation and decide if a sale is warranted.
9. Too much information: When it comes to investing, quality trumps quantity. Clicking refresh on your stock picks or scouring every financial blog for the latest knee-jerk reaction isn't productive. Sometimes a single reliable data source is far more valuable.
More from MarketWatch
VIDEO ON MSN MONEY
Anyway......generally, by the time an investment becomes "hot", the big money's already been made.
Copyright © 2014 Microsoft. All rights reserved.
Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.
[BRIEFING.COM] The major averages hover just below their highs with one hour remaining in the final session of the week.
Tomorrow, most global markets, including the U.S., will be closed for Good Friday, while Japan's Nikkei and China's Shanghai Composite will remain open. On Monday, the New York Stock Exchange will open at its regular time, while markets across Europe and Hong Kong's Hang Seng will remain closed for Easter Monday. Nasdaq +17.71 at 4103.94... NYSE Adv/Dec ... More
More Market News
|There’s a problem getting this information right now. Please try again later.|
MUST-SEE ON MSN
- Video: Easy DIY smoked meats at home
A charcuterie master shares his process for cold-smoking meat at home.
- Jetpacks about to go mainstream
- Weird things covered by home insurance
- Bing: 70 percent of adults report 'digital eye strain'