Gray Areas Abound
We all think we know what "investing" means. Merriam-Webster defines it as “to commit money in order to earn a financial return.”
On the other hand, "speculating" is: “to form a theory or conjecture about a subject without firm evidence.” But if the difference is so clear, why do so many people go so far astray — thinking they’re investing when what they’re really doing is speculating?
The best investments are transparent, reasonably liquid (they can be easily bought and sold because there is a ready market for them), have some intrinsic value, and a track record.
The thing is, the gray area can be wide. Some “hot” investments are really just gambles in disguise. Then there’s the fact that when not done thoughtfully, some things that look like investments can turn out to be, with hindsight, bets.
With that in mind, here’s a list of nine terrible investment ideas.
Art: The Allure
It’s certainly glamorous. Works by Banksy and Damien Hirst sell for millions and art fairs pop up in new cities seemingly every year. But there are lots of problems with treating art as an investment.
For starters, the market is highly concentrated — and very competitive.
According to Artnet, “the work of just 25 artists generated almost as much money at auction as the work of thousands of other artists combined.”
A whole industry is dedicated to investing in art: from consultants and advisors who will gladly, for a fee, counsel you to investment funds and art indices that report prices as if artworks and artists traded like stocks. But even the experts don’t necessarily agree on price. And since each artwork is unique, deciding on a value is not so simple.
Art: The Danger
The market is also highly susceptible to fads and fraud — not helped by frequent difficulty in tracing provenance, an artwork’s record of ownership.
Assuming you could correctly identify an artist whose work would eventually attract a following and high prices, you’d have to consider how to eventually cash in your gain. Which leads to another problem: liquidity.
Art doesn’t sell like stocks and bonds or even real estate does. The sales process takes a lot of time and involves plenty of fees.
You could stick to bankable names and build relationships with trusted galleries. But you still aren’t likely to come anywhere close to the type of long-term, consistent returns you could get through investing in securities.
So buy art for art’s sake — because you like it, not as an investment strategy.
Baseball Cards: The Allure
Once upon a time, this might have looked like a good investment.
Now it sounds a lot like how Jason Sherr, senior vice president and investment officer at Wells Fargo Advisors, describes speculating: “something more speculative tends to have a shorter term horizon with higher perceived upside potential.”
Trading in baseball cards exploded into a $1 billion industry by the end of 1980s. But it was short-lived. By the early 1990s, the market had peaked.
Baseball Cards: The Danger
The problem with baseball cards, cars, and other collectibles such as art and wine as investments is that oversupply is a constant threat and as with art, they’re vulnerable to changing fashions. Another commonality is that condition and rarity matter.
Vintage cards from small production runs, printed on high quality stock, and with high grade scores might have value. As might cards with an athlete’s signature. But they need to be in pristine condition.
Play your cards right. Even famed cardmaker Topps has this to say about its cards, “Topps does not, in any manner, make any representations as to whether its cards will attain any future value.”
Far better to set aside small sums that you are fully prepared to lose, to satisfy your interest in amassing and trading baseball cards than to count on it as a way to build wealth.
Bitcoin: The Allure
Bitcoin and other so-called digital or crypto currencies were touted as replacing cash. They were also supposed to allow completely anonymous transactions, be more secure than cash and existing payment systems, and save the world.
The fact is cryptos have skimpy track records, aren’t very liquid, and have experienced wild price swings.
In late December Bitcoin touched a high of $13,407. Three months later it was at $6,700. It's rebounded a bit since then but is far from stable.
Bitcoin: The Danger
Sure, some people who got in early made money and were able to cash out.
But trading and markets are not transparent. And Bitcoin exchanges have been subject to hacking, high profile thefts, failures, and assorted other periodic scandals.
But with governments variously classifying them as currency, assets, or simply property, non-existent to patchy regulation depending on the country, and a growing number of banks unwilling to allow Bitcoin-related deposits for fear of being associated with illicit activity, it’s a highly risky proposition with an uncertain payoff.
Your Employer’s Stock: The Allure
Betting the farm on company stock is a common mistake.
People think, “I work here, I like the company. I can buy the stock at a discount. It’s a win-win.” Actually it’s not. The thing about investing is that the vast majority, something like 90 percent, of returns can be explained by how you allocate your assets across investments.
In other words, owning several types of investments — being well-diversified — is likely to generate more gains over the long run than being highly concentrated in just a handful.
Your Employer’s Stock: The Danger
Investing in company stock is like placing all your chips on one card. Not only is your income coming from this company, but your retirement (if you’re using your 401(k) to buy shares) funds, and maybe some portion of your private portfolio are exposed too.
What happens if the stock price tanks, or the company goes belly up? You’d be out of a job at the same time your portfolio takes a hit. And if you have to cash out to raise funds, you’ll be locking in your losses.
If you must invest in company stock, do it sparingly — and make sure you are well-diversified in other areas.
Classic Cars: The Allure
Vintage cars definitely have an enthusiastic fan base. There are collectors’ networks, regular auctions, and of course car shows. And like other collectibles, they have their sweet spot: specifically cars made by Porsche and Ferrari from the late 1940s to the mid 1960’s.
But the reality is, while you might be able to buy a classic car for less than you think — some models can be had for low five figure amounts — whether you’ll ever make money from your purchase is in doubt.
Restoration, upkeep and storage costs plus insurance all need to factor in to your numbers. And if you plan to actually drive the car, count on needing the services of a mechanic and pricey part replacements. The rarer your car is, the more expensive it will be to find experts with experience dealing with your model.
Classic Cars: The Danger
Bottom line: vintage cars make good nostalgia items if you can afford to buy them. But don’t let emotions drive your decision.
Condition, workmanship, rarity, and original features are all important for resale prices.
Even if you have all that working in your favor, these cars appeal to a limited market, only a tiny percentage sell at auction, and values fluctuate significantly. They aren’t an investment.
Penny Stocks: The Allure
Let’s count the ways this is a truly terrible investment idea. Penny stocks get their name from their low prices, less than $5 a share. But you get what you pay for.
These extremely small market capitalization stocks trade on what are called the over-the-counter (OTC) markets.
Because these exchanges are poorly regulated (read risky), companies whose stocks trade this way don’t have to provide the kind of information, such as audited financial statements, those that trade on regular stock exchanges do. So you have no idea what you’re getting.
Penny Stocks: The Danger
They are roach motels of financial markets: you can check in, but you can’t check out. Penny stocks change hands infrequently and trading volumes are low, making them hard to sell. Because there is not a big pool of buyers, one trade or news item can really move the market, which makes them attractive to scammers.
If you really want to play in small stocks, there is a better way: small-caps. These stocks usually have a total share value, market capitalization, roughly between $300 million to $1 billion.
There are several widely respected indices including FTSE Russell and Wilshire Associates that track them and mutual funds that track the indices.
Startups Your Friends Recommend: The Allure
Remember the app that texted people “Yo?” At one point, it was supposedly worth $10 million.
But that $10 million was purely hypothetical, based on what a specific group of investors reportedly paid to buy into the company in 2014.
There’s no way to know what the real value was or is because there’s not a ready market for Yo. It’s not a public company with shares that trade, nor has the app company been sold, which would establish a definite value.
Startups Your Friends Recommend: The Danger
When it comes to startups, even supposedly sophisticated investors, venture capitalists, expect to win big only one-third of the time.
That’s why they invest in lots of startups. That way, they are diversified, and their winners will offset the seven, on average, duds in their portfolio.
VC firms also have analysts to research investments, lawyers to pore through the fine print, and they get plenty of face time with founders to help them decide if the people running the startup are trustworthy and know what they are doing. You’ll get none of that.
Plus you’ll be investing after multiple VC rounds … so you’ll pay a much higher price. If you want to take those odds, go right ahead. Just don’t call it investing.
Vineyards (and Wineries): The Allure
There’s an old joke that asks, “How do you make a small fortune in the wine business?” Start with a large one.”
On average, it takes five years to get a first harvest from a new vineyard. During that time you’ll be dropping money on equipment (tractors to till the field, sorting, pressing, and pumping equipment, barrels for aging wine, bottles to put it in, etc.).
Vineyards (and Wineries): The Danger
Then there are consultants, workers, and storage costs to pay. Don’t forget wild cards like bad weather during harvest, an ill-timed freak hailstorm, or a natural disaster could wipe out an entire crop. Not to mention bugs that kill vines and critters (birds, rabbits, deer, moles, take your pick) that eat them.
And don’t forget that wine is highly regulated; permits are required for just about every step in the process.
The bottom line, vanity purchases like vineyards and fancy cars are likely to leave you digging yourself out of a deep hole.
Anything You Don’t Understand: The Allure
One of the things that makes something suitable as an investment is that you understand what role it in plays in your portfolio.
Another guiding principle is, as Sherr puts it, to “focus on what you can control … how your assets are diversified, how they are allocated, how much you are saving and how you behave.”
For example, if you’re saving to buy a house in 10 years, you want investments with high growth potential.
You also should know what the risks are, and how they stack up with your tolerance for them. In other words, are you the type of person who is okay with occasional drops in price but who’d lose sleep if something you owned was suddenly worth 30 percent less?
Risk tolerance is highly personal; but if worrying about losing money keeps you awake at night, then it is a bad investment for you.
Anything You Don’t Understand: The Danger
According to investment professional Danielle Leone of Principal Capital Intelligence, investing involves “looking at the downside” before you invest.
She adds that it’s wise to “focus on investments whose downside risks are quantifiable.”
If you can’t make heads or tails of what your broker, financial advisor, banker, or someone else is telling you about an investment, then you don’t understand what drives the risks and returns, much less what the downside, or sides, are.
One last thing to keep in mind, just as in life, in investing there are no guarantees. As Leone explains, “You can be right and still lose money.”