Investments (and People) to Avoid

I'm a big fan of simple, low-cost investments for your retirement savings. Most Americans don't have the time or expertise to evaluate complicated investment and insurance products. Over the years, I've seen lots of people make uninformed or poor choices, and as a result, they lost lots of money. If you can avoid common investing mistakes, you've won half the investing battle.

At the risk of making some investment or insurance salespeople howl, here's my list of investments to avoid--and the people who recommend them.

• Whole life insurance (a.k.a. universal life or variable universal life). These products mix protection (insurance) with investing. Unfortunately, the premiums are usually high and the returns can be mediocre. If you need the protection of insurance, it's usually best to buy term insurance⎯which has much lower premiums⎯and invest the difference elsewhere.
• Tax-deferred annuities (TDAs) with high expenses. The only reason to consider TDAs is if you're in a high tax bracket--in the mid-thirties or higher--because this product defers taxation on investment income. However, you should only use TDAs after maxing out contributions to your 401(k) plan. Even then, if you're in a high tax bracket, you may be better off with other investments with minimal taxes on investment earning, such as municipal bonds or index funds. If you still want a TDA, then pick one with a good investment track record and low expenses, such as those offered by Fidelity Investments, T. Rowe Price, or Vanguard.
• Most stockbrokers who buy and sell individual stocks and bonds for you, unless you have $500,000 or more to invest. It's hard to find a good adviser who will work with "small" amounts to invest. Instead, mutual funds and other commingled investments provide professional management to investors with "small" amounts to invest.
• Load mutual funds (and financial advisers who recommend them). With a load mutual fund, two to six percent of your initial investment is pocketed by the person who sells the mutual fund, whereas all of your investment goes to work with a no-load mutual fund. There's been no measurable difference in the overall investment performance of load vs. no-load funds, so why pay the up-front fee?
• Anybody who makes unrealistic promises about investment returns. Instead, learn what's realistic for different types of investments. Over long periods of time, annual stock returns have averaged from 8 to 10 percent. Bonds and other fixed income investments are currently paying interest in the 1 to 6 percent range, depending on the issuer and maturity period. If somebody "guarantees" or implies they can achieve much higher returns with little or no risk, take your money and run! If something seems too good to be true, most likely it is. Morningstar provides good information on current yields offered by various types of bond funds.
• Tax shelters. These only make sense for people with a lot of money, and even then, they're difficult to compare and analyze. And many of them blow up when investigated by the IRS.
• "Hot" stock tips. Take the time to investigate your investments. Don't jump at tips you hear about at the beauty salon or hardware store; do your "tipsters" look like professional financial advisers?
• Your brother-in-law or "advisers" you meet in social situations or who are recommended by family or friends. I see many articles that encourage the reader to get references from family or friends, but that's exactly how affinity fraud takes place (affinity fraud is where financial criminals find new targets via friends and family members of existing ones). In 2008, Bernie Madoff provided the latest example of affinity fraud. Well-known celebrities got taken just because their buddies recommended him and Madoff promised them high returns. As a result, Madoff "made off" with their money. Remember: Know what's realistic! And check out any financial adviser recommended by family and friends just as you would anybody else.

All of the above situations aren't necessarily always bad, and I'm sure that you might get lucky with some of these and actually make some money. However, there's enough potential for poor outcomes that you should investigate them very carefully. If you don't have the time or expertise, it may be best to avoid them altogether and stick with the "tried and true."

What's on your list of investments to avoid?

Steve Vernon

View all articles by Steve Vernon on CBS MoneyWatch»
Steve Vernon helped large employers design and manage their retirement programs for more than 35 years as a consulting actuary. Now he's a research scholar for the Stanford Center on Longevity, where he helps collect, direct and disseminate research that will improve the financial security of seniors. He's also president of Rest-of-Life Communications, delivers retirement planning workshops and authored Retirement Game-Changers: Strategies for a Healthy, Financially Secure and Fulfilling Long Life and Money for Life: Turn Your IRA and 401(k) Into a Lifetime Retirement Paycheck.

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