Investors today are more than ever on their own when it comes to preparing for retirement and financial independence. For most of us, gone are the days of relying on a safe, traditional pension. And at the same time, when it comes to social security, while future benefits are unlikely to disappear completely, the path of sustainability for this system remains murky. (Even so, given the dysfunction in Washington, who in their right mind would want to rely exclusively on anything our government promises?)
Needless to say, investors face plenty of challenges on their own, and the environment has become much more difficult to navigate. As we have mentioned many times, product innovation on Wall Street has increased exponentially and the marketing for these products has exploded. In short, there seems to be an overwhelming number of choices for investors, both in terms of types of investments as well as individual strategies; it can all seem exceedingly complicated.
In this blog, we list the top 4 investments we think most investors should AVOID. While we favor uncomplicated and low-cost investing strategies, there are other investments---even some which we may not use in our own practice--that we still recognize as being useful. However, there are far more others that we feel are too costly, too complicated and, ultimately, unsuitable for the average investor. Here are our top four to avoid:
Annuities. While there certainly are a few scenarios where an annuity can make sense, these are generally very expensive and complicated products. First, your investment is usually locked up for what can be many years. Given this constraint, ask yourself a simple question before buying an annuity: “If this is such a great investment, why is my money restricted for so long?” The fact is sponsors of annuities (e.g., typically large Insurance companies) pay out huge commissions to the selling agents and brokers of these products and need customer funds locked in for many years to recoup that outlay. In addition, the most popular annuities typically offer a high “guaranteed income benefit.” But what isn’t really properly disclosed are the total fees involved, whether or not the investor loses the dividends (…usually they do!), and the difference between the “benefit” base vs. the “income” base. These are crucial elements of the product, but unfortunately, not often fully understood by the end-buyer.
Structured notes. Another very complicated product. At the outset of the sale, typically a high interest rate is teased to the investor. While this rate may seem tempting, what may not be so appealing is that the investor is taking the full credit risk of the issuer; in the “fine print” there are various scenarios where return of full principal is not guaranteed upon the maturity of the note. In addition, these are also very illiquid investments. Trying to sell a note before maturity is often nearly impossible….without taking a loss. In most cases, the only secondary market for a structured note is the issuer, itself. Talk about a conflict of interest!
Unit Investment Trusts (UITs). UITs have similar characteristics of an exchange-traded fund (ETF) BUT with much, much higher internal fees. And just like structured notes, the secondary market to sell a UIT before its maturity is virtually non-existent. For many investors, this type of illiquidity can prove to be significantly damaging if they need to sell the security for a big loss before it comes due.
Indexed Universal Life Insurance (IUL). First, insurance and investments are NOT the same and should be treated as such; they should be separate. Individuals should first identify what their true life insurance needs are and then determine the least costly way to fund them. First and foremost, the purpose of insurance is to protect against a financial risk that you are not able to self-insure against (e.g., catastrophic damage to real estate you own or the early passing of a family member). Unfortunately, IUL tends to mix insurance and an underlying investment, often confusing an investor. Plus, there are cap limits involved with these policies that the issuer may have the freedom to adjust during the life of the contract. It is unlikely that these issuer cap adjustments will favor the investor over time….
In short, what do all four of these investments have in common? In every case the investors’ money is tied up in the product for a long time, making the funds inaccessible (…often even in the case of an emergency!) Of course, as outlined, one of the primary reasons for this long lock-up period is that these products all have high fees and are very complicated.
Nonetheless, these products are widely and aggressively marketed by Wall Street. In fact, we’d bet that a majority of investors have been invited to some sort of dinner/lunch presentation which promotes these products. The truth is when there are so many fees and commissions at stake, it is not surprising. In contrast, however, we would ask: “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?” We would estimate very few!
In conclusion, if you want to prudently achieve financial independence, you may best be served by staying away from these products. In most cases, rather than accelerate your path to greater wealth, they will just set you back financially. Instead, you should try to learn about the new innovations on Wall Street, embrace those products that best fit your risk profile, and partake in strategies that give you complete freedom and flexibility…..Especially those investments that are priced daily, can be liquidated in a timely fashion and which have reasonable costs.
By implementing these tenets, you should be able to create a well-designed and efficient investment plan!
All the best,
NCM Capital Management
Disclosures: This is not an offer or solicitation for the purchase or sale of any security or asset. While the information presented herein is believed to be reliable, no representation or warranty is made concerning its accuracy. The views expressed are those of NCM Capital Management, LLC and are subject to change at any time based on market and other conditions and NCM does not undertake to update or supplement its newsletter or any of the information contained therein. Past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will be profitable. There is no guarantee that the investment strategies discussed above will work under all market conditions or are suitable for all investors and each investor should evaluate their ability to invest long-term, especially during periods of downturn in the market. Investors should consult their investment professional prior to making an investment decision. Investment advisory services are offered through NCM Capital Management, LLC, an SEC-registered wealth advisory firm domiciled in New Jersey. This communication is not to be construed or interpreted as a solicitation or offer to sell investment advisory services. For additional information about NCM Capital Management, LLC, you may request a copy of our disclosure statement as set forth on Form ADV. Readers are encouraged to consult with their own professional advisers, including investment advisers and tax/legal advisors. NCM Capital Management, LLC does not provide legal or tax advice. NCM Capital Management, LLC can assist in determining a suitable investing approach for individuals, which may or may not resemble the strategies outlined herein.