Tuesday 15 February 2011

7 Things Not to Invest In

To help clarify the DIY Income Investor approach I thought it would be useful to summarise what I recommend you don't invest in.

1) Funds / Unit Trusts / Investment Trusts

It is the same all over the world; these investments:
  • cost a lot in entry fees, annual fees and hidden costs
  • do not generally perform very well at all (and the few one-off annual successes are rarely repeated)
There are many studies that show that 'professionally managed' funds just do not perform very well - for example, a review of Canadian funds shows that all but a tiny proportion under-perform simple index investing (this is pretty typical, wherever you invest).

2) Index Funds

Index funds are a much lesser evil than managed funds - and they generally outperform the latter, at significantly lower cost. However, I don't recommend these as they generally do not pay you any income - it is all about floating up and down on the general market level.

3) Complicated stock market instruments

There are many examples of these, usually extending over several years, with a return calculated on the future value of the stock market. Some even promise to guarantee that you will get back at least your initial investment (or a proportion of it). Do you think they offer these because they want you to make money from them?

Steer well clear - these schemes are meant for the uninformed.

4) Spread betting / forex / options, etc

Please....do you really think you are that smart? You might be lucky, but that is all it is.

5) The Lottery

Look at the odds - seriously, you are just throwing your money away.

6) Gold

It doesn't give you income - in fact it costs you money to hold it, so it is not part of the DIY Income Investor approach. Yes the price has gone up. If you are desperate to own gold (for the coming stock market crash?), buy some Krugerrands and keep them somewhere safe.

7) Collectables

Again, it costs you money to keep (insurance, secure storage). Some collectables might be fun - like stamp collecting - but keep it as a hobby rather than an investment.

I am not a financial advisor and the information provided does not constitute financial advice. You should always do your own research on top of what you learn here to ensure that it's right for your specific circumstances.

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