What Investments Should You Avoid?

Full life insurance costs more than term insurance, and subprime mortgages are taken out by customers with low credit scores, making them more likely to default on their loans. These mortgages do pay higher interest rates to investors, but they carry significant additional risk. Penny stocks trade at low prices because the company that backs them is usually losing money and could be on its way to bankruptcy. They are always a gamble because of the manipulation in the market.

Stock market promoters publish articles about how the one-cent shares of XYZ are “the next Microsoft” or “the next Apple”, trying to increase the share price in order to be able to sell and make a profit. At best, penny stocks are speculation, but they're also subject to market manipulation, making them toxic investments. Companies with low credit ratings are more likely to stop paying or go bankrupt. If you own a high-yield bond from a bankrupt company, you're likely to lose your entire investment.

Buying high yield bonds through an investment fund is one way to reduce this risk, but it doesn't completely eliminate it. Private placements can be legitimate investments in certain situations. However, for the average investor who cannot obtain enough information about a private placement to determine its legitimacy, these types of investments are toxic. Like penny stocks, private placements are often driven by stock promoters who fraudulently promote stock increases without any information about the worst-case scenario.

Private placements can also be difficult to sell, at least until the big shots involved in the placement have already sold their positions at a profit. Savings accounts aren't “toxic” in the sense that you'll lose all your money. However, many of the world's best-known banks pay only a symbolic interest rate and the national average savings rate is only 0.05%. When you factor in inflation and taxes, the money in your savings account doesn't do anything for you, but stays there.

Keeping your money in these types of savings accounts will never generate the types of returns you should be looking for in a long-term investment account, or even the ones you could get with a high-interest savings account. You'll probably see ads all the time for investments that are “guaranteed” a return of 20% per year or even more. Often, details about what the investment actually is are scarce. The boldest promoters might even include keywords such as “backed by the government” or “insured”. Especially in years when your own portfolio isn't working much, it can be tempting to take a look at these “investments”.Who wouldn't want to earn a guaranteed 20% per year? The Nigerian Prince (or “41”) was one of the original and most publicized email scams, and most people have already learned that it's toxic.

However, variations of this original scam have become increasingly sophisticated. In addition to asking for money, these scams can request your bank account information and even impersonate you to take over your financial life. If you ever receive any kind of unsolicited “investment opportunity”, be very careful and do your homework. Even if it seems that the investment opportunity comes from a legitimate company, consult a financial advisor to verify the sender and never provide your personal and financial information to an unknown source. Actions that fall sharply are also known as “falling knives” because, like a knife that falls through the air, the chances of you catching it without getting hurt are minuscule.

Many stocks that fall 50%, for example, continue to fall until they lose 70%, 80% or even 100% of their value. Since it's almost impossible to detect a stock at its absolute minimum, it's much safer to wait to invest until a stock returns to a confirmed upward trend; only then will a stock have the potential to go from being a toxic investment to one with long-term growth potential. Airline stocks include some of the best-known names in the world, especially for people who travel a lot. Delta, American, United, Southwest, JetBlue and others have their own publicly traded shares. The COVID-19 recession has practically decimated airlines, but even before the travel industry was crushed by the pandemic, airline stocks were potentially toxic investments. If you intend to buy securities such as stocks, bonds or mutual funds, it's important to understand that you could lose some or all of your money before investing.

Unlike deposits in banks insured by the FDIC and credit unions insured by the NCUA, the money you invest in securities is not normally insured by the federal government. Whether it's participating in a GameStop stock frenzy or playing Powerball with hopes of winning big - there are certain investments that should be avoided at all costs due to their high risk nature and potential for loss. In conclusion, it's important for investors to understand that all investments involve some degree of risk and should be approached with caution. Before investing in any type of security or asset class - whether it's stocks or bonds - investors should do their research and consult with an experienced financial advisor.