Avoiding Bad Investments: Five Simple Rules
By being aware of potential pitfalls and asking the right questions, you can steer clear of many bad investment opportunities. Follow these guidelines to safeguard your financial future.
1. Beware of Surrender Charges
Stay away from investments that come with surrender charges, as they can limit your ability to access your funds when needed. Whether it's a divorce, relocation, or healthcare expenses, surrender charges can pose significant challenges. Be cautious when considering annuities and "B" share mutual funds, as they commonly carry these fees.
2. Exercise Caution with Illiquid Assets
Be mindful of investments with limited liquidity, such as real estate partnerships or private equity investments. While they may promise higher returns, lack of trading volume can make it difficult to access your funds when necessary. To mitigate risks, diversify across different asset classes and sectors, keeping illiquid investments below 15% of your portfolio.
3. Avoid High Upfront Commissions
Steer clear of investments that charge hefty upfront commissions, as they may not be in your best interest. Consider options that do not involve paying fees upfront, ensuring ongoing service and education from your financial advisor. Look for transparent ways to compensate for financial advice, staying wary of products with commission fees.
4. Understand Your Investments
If an investment seems overly complex or confusing, take a step back and seek clarification. Don't hesitate to ask questions and seek professional advice if needed. Avoid investments that don't make sense to you, as lack of understanding can lead to poor decision-making.
5. Diversify Your Portfolio
Avoid putting all your money into a single type of investment, as this can expose you to unnecessary risks. Spread your investments across various asset classes and types, such as annuities, REITs, and tax-deferred accounts. By diversifying your portfolio, you can mitigate risks and ensure a more stable financial future.
