Oh, how painful it has been to learn these lessons.
I’ve been around the investment industry for a long time and have made plenty of mistakes. I’ve also seen a lot of variations on the theme of investing, some of which have made the industry better and others of which seem like nothing more than elaborate ways to separate investors from their money. The growth in low-cost index investing has certainly been a positive. On the other hand, high-cost and low-quality products are still prolific in the marketplace.
The following is my Top Ten List of When Not To Invest. This list offers a few red flags to warn you when you might be getting sold something you’d best avoid. It’s far from a complete list, but it will help you learn from some of the mistakes I have encountered:
10.) If you can’t get clear answers to your questions about an investment, don’t buy it.
9.) If the risks in an investment are not clear to you, don’t buy it.
8.) If the costs to own an investment are not clear to you, don’t buy it.
7.) Avoid an investment that is promoted as “no cost to you” because you are still paying for it; you just don’t know how, or how much.
6.) Be careful about buying investments that you can’t get out of for weeks, months or years.
5.) When the words “proprietary,” “private” or “non-traded” are used, think “high-fee” and “illiquid”.
4.) Avoid products that are marketed as “smart,” because that’s just smart marketing.
3.) Don’t assume that a complex strategy is better than a simple strategy. The only thing extra complexity is likely to add is extra cost.
2.) Don’t buy investments from someone who is paid a commission without getting an objective second opinion.
1.) Don’t listen to anyone who says low-cost index funds are dangerous. What they probably mean is that index funds are dangerous to their livelihoods.
Charles D. Ellis wrote about making fewer mistakes in his classic book Winning the Loser’s Game. His observation was that winners don’t do anything special; they just make fewer avoidable errors than the losers. In investing, what separates winners from losers is the number of unnecessary mistakes we make.
I’m sure any experienced investor could share his or her own “when not to invest” lessons learned the hard way. We all have battle scars. The trick, as Ellis would agree, is not to incur any more.
RICK FERRI runs Ferri Investment Solutions, a pay-by-the-hour financial advice service, and is based near Austin, Texas.