To quote Merriam-Webster, the definition of investing is “to commit money in order to earn a financial return”.
To quote it again, the definition of speculating is “to form a theory or conjecture about a subject without firm evidence”.
While a lot of us feel confident in our investing skills, a lot of people’s actions don’t always fall into investing, but rather speculating. In the world of money, it’s actually not that surprising to see people speculating more than investing. But why is that? Why do we think we’re investing in something when we’re actually speculating?
Any skilled investor will know that the best kind of investments you want to look out for are transparent, reasonably liquid (i.e. you can easily turn the item into cash), have intrinsic value to it, and it has a track record.
But even when you’re looking at that criteria, it’s not all that clear what is a good investment or not. Some “hot” investments can look great on the surface, but looking deeper, they’re all gambles. On top of that, you’ve also got some investments turning out to be more like bets if you haven’t done enough research.
Without a doubt though, the investment ideas we share below will not do you good in the long term and here is why.
09. THINGS YOU DON’T UNDERSTAND: WHAT TRAPS PEOPLE
One of the key elements to an investing decision is being aware of what each investment’s role is in your portfolio. Each investment is like a performer and there should never be a performer doing absolutely nothing.
All in all, these investments should help you achieve the goals that you want. For example, if you want to buy a house in, say, 10 years, you’ll want to look for investments that have a high growth potential.
You also want to be aware of the risks and how they stack up to your tolerances. You can gauge this by asking how you’d react if you noticed a dip in price versus a 30 percent drop in what you owned. Some would be cool with the small fluctuations in price, but others would be in utter shock, and probably would lose sleep if they lost 30 percent.
In the end, risk tolerance is your own personal feeling towards risk, but a good rule to follow is this: if you’re worried about losing money from this investment or you don’t understand it, then it’s probably a bad investment for you.
09. B. THE DANGERS OF THINGS YOU DON’T UNDERSTAND
There is a saying in the investing world, that is – a great rule to follow: look at the downside of every investment before you invest.
To expand on that, you want to be investing only in things, where the downside risks to the investment are quantifiable.
In other words, if you have no clue what a broker, banker, financial advisor, or anyone else is telling you about any sort of investment, then avoid it. This goes for everything about the investment. The risks and returns, what the downsides actually are, or even the sides at all. Everything.
08. ARTWORK: WHAT TRAPS PEOPLE
Artwork today has turned from mere art to a now thriving industry, and through this industry, there are many who are looking to leverage art in their own way. From the artists themselves making the art, all the way to the investing side of things.
This industry has attracted tons of people and it makes sense. Artwork today – especially pieces from Banksy and Damien Hirst – can sell for millions of dollars at art fairs in various cities year after year. And while the pieces are impressive and are deserving of the value, you run into a lot of issues when you turn to the investing side.
As we have mentioned above, there are many people looking to profit off of art. You’ve got consultants and advisors who will manage your art investments for a fee and work for you much like a stock broker would. But the issue with the industry is that price points for art aren’t always as precise like a stock. As Artnet explained once “the work of just 25 artists generated almost as much money at auction as the work of thousands of other artists combined”.
So not only are you entering into a competitive market, but you may be paying top dollar for a piece that is worth a quarter of what you paid for.
08. B. THE DANGERS OF ARTWORK
On top of those clear problems, the market is also a target for fads and frauds. This problem is amplified by the fact that it’s hard to trace provenance, a record of the artwork’s owner.
And even if you could properly identify who the artist is and attract enough of a following and high prices, you still have to cash in those gains. This comes to another issue of the industry: artwork is not that liquid.
Artwork doesn’t sell like stocks and takes a massive chunk of time and fees before you see any kind of money from it. This rule even applies to those who have a solid relationship with galleries as well.
In the end, you are much better off buying art for the sake of liking it and putting your investing money into securities.
07. BASEBALL CARDS: WHAT TRAPS PEOPLE
A long time ago, baseball cards might have looked like a sound investment. But that boat has sailed long ago. In the 1980s, the baseball card industry was a $1 billion dollar industry. That wave has stopped by the early 1990s as the market had peaked.
07. B. THE DANGERS OF BASEBALL CARDS
But why exactly did it peak? Well, that’s very much the case with any kind of art. The main issue with baseball cards, cars, and other collectibles is that oversupply is a constant threat. If there is too much of something, the price is going to drop.
What also threatens art is the change in fashions. Not only that, but you also need to look at conditions and rarities too.
When you look at vintage cards, the high valued cards are going to be the ones that have a high quality stock, and high grade scores. A signature on the card by the athlete might also raise the value too. But outside of that, the card needs to be in pristine condition.
But even then, cards like these can be hard to make any kind of money. In short, you’re betting. You’re betting that the value of the cards is going to stay the same or rise up in price. And like with any card out there, it’s not always guaranteed to hold any kind of future value.
There’s nothing wrong with building up a collection over the years, however it’s important to be optimistically pessimistic. Be fully prepared to lose money, but be surprised and happy if you walk away with a good chunk of change from trades or sales of these cards. Just don’t use this as your only way of building your wealth.
06. EMPLOYER’S STOCK: WHAT TRAPS PEOPLE
The difference between a good investor and a bad one is how they view employer stocks. For many people they think it’s a good idea to invest in company stock. After all, you get a discount and stocks will encourage you to put more money back into the company. It’s a win-win for both.
The reality is far from that.
Good investors know that about 90 percent of their returns can be explained by how their assets are allocated across their investments. To explain it differently, if you own several types of investments – and they are diversified – the more gains you’ll have in the long term versus investing in a handful of them.
06. B. THE DANGERS OF EMPLOYER’S STOCK
By all means, it’s not a reason to not invest in employer’s stock. You need to keep in mind a few things. Firstly, it’s smarter to diversify your portfolio, so buying a few stocks won’t hurt you so long as you are diversifying.
The second is that you need to be aware that investing into a company stock will give it money. It’s obvious I know, but your contributions of that stock are going towards the company’s retirement plan. That means your pension, and part of your retirement plan is being exposed to this.
What I’m saying is what if the prices of the stock tank? Or what if the company goes belly up? Not only are you going to lose your job, but you’d probably be out of a retirement plan and your investments would take a hit. Of course, that’s the risk you’ll run in with any business you invest in, but investing into a company you are working for personally is a tougher pill to swallow and is a heavier blow.
05. BITCOIN/CRYPTOCURRENCY: WHAT TRAPS PEOPLE
Another investment that has garnered a lot of attention in recent years is bitcoin and various cryptocurrencies. Touted as the tool that’ll replace cash and our entire financial system, many people have placed a massive amount of trust and faith behind these coins. The fact that transactions are anonymous also swings in their favour too.
But that’s really the positive thing about cryptocurrency.
When you see it as an investment, you see that cryptos have small track records, are they are not all that liquid, and fluctuate wildly in price. A good example of this is looking at Bitcoin. It’s the flagship coin, and in December 2017, it hit an all time high of one coin being worth $13,407. Fast forward three months later, and the price tanked to $6,700, over half of what it was worth before. It’s obviously recovered a bit, but it’s far from stable.
05. B. THE DANGERS OF CRYPTOCURRENCY
Absolutely, people have been able to invest in crypto and walk away with a lot of cash. About what’s brought people into a fervour to invest in the first place have talked multiple stories of people making millions from this.
But why is there such a divide, and why it’s better to avoid investing in crypto is the industry itself. Because there is a level of animosity to this, it’s hard to tell who you are investing in and where your money is going. This is perfect ground for hackers and scammers to scam people of their hard earned coins and real money.
Overall, the market isn’t transparent and exchanges are prone to hacking, failures, high profile thefts, and various scandals. As such, you see government patching things up by classifying them and regulating them. On top of that, banks are generally unwilling to accept Bitcoins or any other cryptocurrency transactions out of fear of being accused of illicit activity.
04. PENNY STOCKS: WHAT TRAPS PEOPLE
“Under $5 per share” sounds like a steal for many, but that’s where the benefits end for these stocks. As the old saying goes, “you get what you pay for”. And let me tell you, this is a terrible investment idea.
The biggest thing is while the price is laughably low, these penny stocks are traded on what’s known as over-the-counter (OTC) markets. And these markets aren’t as regulated as traditional stocks. To put it into perspective, companies who trade through these markets aren’t required to provide any inner workings of the business (i.e. their audited financial statements). This means that you are essentially agreeing to put money towards something that you don’t even know.
04. B. THE DANGERS OF PENNY STOCKS
Penny stocks are literally the roach motels of the financial world. You can check in at any time you like, but you’ll have a tough time checking out. Penny stocks don’t shift hands that much, and because of their low value, it’s really difficult to sell them. This implies that there is a relatively small pool of buyers, which is the perfect mixture for scammers to attract buyers and scam them.
It’s best that you avoid these kinds of stocks, however there are some other small stocks worth looking at in the form of small-caps. These types of stocks are small, but they usually show you a total share value, and market capitalization that ranges between $300 million and $1 billion.
You can find these small-caps on several indices that are respected throughout the financial world too. The most notable ones are FTSE Russell and Wilshire Associates, which track them, and there are several mutual funds that track these indices too.
03. CLASSIC CARS: WHAT TRAPS PEOPLE
Vintage cars have a good and enthusiastic fan base if you look for it. You’ve got collectors’ networks, auctions, and, more commonly, car shows that are open to the public. And while the blast from the past is nice, that’s really where the positives end with these collectibles.
Unless your vintage vehicle was made by Porsche or Ferrari between the late 1940s to mid 1960’s, chances are that you’ll not be getting much out of it in terms of investing. Some models today can be bought for low five figure amounts at most.
And that’s even before we get into the actual maintenance of the car. Even if you don’t plan to drive the car, you need to consider restoration, upkeep, insurance, and storage costs. And if you do plan to drive it, you’ll need to involve a mechanic that has the skills to operate the car, should anything happen to it. On top of that, you’ll also need to get the proper parts, which are rare, and therefore, expensive to replace.
03. B. THE DANGERS OF CLASSIC CARS
Vintage cars are nice nostalgia trip and make for a nice money sink if you can afford to buy them, and you genuinely love cars. But if you’re not swimming in cash, it’s best to not let your emotions take the wheel.
The condition of the car, the workmanship, rarity and the features of it are all important factors in determining price and even willingness to purchase the car.
On top of that, while the fan base is enthusiastic, you’re still dealing with a relatively small market. While they have auctions, only a small percentage of them actually sell and the price range is wildly different. They’re not as good as a stable investment.
02. THE STARTUP YOUR FRIEND SUGGESTED: WHAT TRAPS PEOPLE
In 2014, a group of investors one day poured $10 million into an app, whose sole purpose was to automatically text people “Yo?” As silly as that may sound, the app – appropriately named Yo – ran into a bit of a snag to determine its valuation.
It’s hard to pinpoint exactly the real value of the app and despite it being downloaded 2 million times, it was hard to tell if the market was really ready for this app. Today, Yo is not a public company with shares that trade nor has anyone even decided to buy the app company yet, which would’ve determined the value of it.
The big question in this scenario is why did so many people put money into this company? A lot of it points back to people recommending it.
02. B. THE DANGERS OF THE STARTUP YOUR FRIEND SUGGESTED
There is definitely a market for people investing in startups, however those who are sophisticated and have experience, know that there are odds of winning big one out of three times.
It’s why when you see people investing in startups, they’re typically diversified in that they invest in many at a time. They do this in a way that the one winner will offset the several duds that are in their portfolio.
This is the same with VC firms too. They have analysts perform deep research and lawyers looking over the fine print. They even go as far as sitting with the founder on several occasions to help them determine if the person running the startup is trustworthy and knows what they are talking about.
On top of that, if you do decide to invest, you’ll be paying extra due to the multiple rounds of VC rounds the company had to go through. That only jacks up the price.
01. WINERIES AND VINEYARDS: WHAT TRAPS PEOPLE
There’s an old joke out there that asks “How do you make a small fortune in the wine business? Start with a large one”.
For sure, there are many companies and vineyards that have had great success, but those successes have taken a lot of time. Starting one yourself, you’ll be looking at at least five years before getting your first harvest from a vineyard. During that time, you’ll need to sink a lot of money into equipment. You’ll need tractors to till the large fields, equipment for pumping, sorting and pressing, barrels to age the wine, the bottles themselves, and more.
01. B. THE DANGERS OF WINERIES AND VINEYARDS
Out of those costs mentioned above, you’ve also got consultants, the farm hands, and your storage costs too. And a lot of those costs can fly out the door when you consider the wildest of all costs: weather damage. Bad weather, natural disasters, or a freak hailstorm can wipe out your crops and your profits. You’ve also got animals to tend to, as well as bugs that can kill the vines or other critters nibble at the grapes themselves.
If that isn’t enough, you’ve also got to keep in mind that the wine industry is highly regulated. You’ll run into a lot of paperwork and permits every step of the way before you even cork a bottle.
At the end of the day, vanity purchases such as vineyards or fancy cars are more likely to leave you in a deep financial pit to crawl out of.
How you wish to invest is entirely up to you, but keep in mind this one thing: investing is like life, there are no guarantees of what you’ll get. With investing you can be right about things, but you can end up losing money.