When trying to decide where to invest your money, the ever-changing nature of the world's investment markets makes finding the future homes for your investment funds a tough job. What is a great investment today might be something to run from next week. It's not hard to find opinions about the best investments, but what about the worst?
TUTORIAL: Investing 101
Consider cash as any money sitting in a zero-interest bank account. In an investment market that is rapidly weakening, not losing money is key and that's where cash is king. For any other reason, cash guarantees you zero positive return.
Certificate of Deposit
The interest rate for a five-year certificate of deposit (CD) is around 2%. If the average rate of inflation is 3%, you are actually losing 1% by tying your money up for five years. Although a CD is safe, too much safety doesn't allow your money to work for you. (Certificates of deposit promise stable income in any market, but do they deliver? For more, see Are CDs Good Protection For The Bear Market?)
It was only a few years ago that real estate was making people rich in a small period of time. Now, with home prices down more than a national average of 32% since their peak in 2006, investors should steer clear of the real estate market until clear signs of life emerge.
Timeshares makes sense for only a small sector of the population. If you plan to vacation in the same resort every year and want to lock yourself into payments which include upkeep on the resort that you will only see a couple of weeks each year, a timeshare is for you. It's also next to impossible to make a profit even if you can sell the share. Most real estate agents don't want to work with clients trying to sell a timeshare and, for those who do, commissions can be as high as 30%
There are many products marketed as investments that are based on an insurance policy, including life insurance. Life insurance should be purchased as an insurance policy that pays the beneficiary if you die. It doesn't have to be any more complicated than that. If you're looking for an investment vehicle that pays a fixed amount, look at bonds or dividend paying stocks. (The most difficult aspect of this complex product is determining how much coverage you need and why. For more, see Top 10 Life Insurance Myths.)
Just because a stock is cheap doesn't make it a good investment. Think of a stock like anything else you would buy. If it's in the bargain bin, it's probably because investors don't want it. You will make more money buying a few shares of a high quality company rather than a lot of shares of a low-quality name.
Although trading in the options market can yield big gains, it's not for the part-time investor due to the high volatility. Stay with quality stocks until you have the training and experience to trade in this market.
To say that treasuries are a bad investment may sound anti-American but treasuries pay a lower rate of return than a certificate of deposit. There are a multitude of fixed income investments that pay better returns than treasuries.
Financial stocks led the market down in late 2008, and since then, they haven't given investors much cause for excitement. The XLF, the exchange traded fund that tracks the performance of the financial sector has lost 80 cents since August 2009, and many stock market analysts believe this trend will continue for the coming years.
For longer term investors, financial stocks represent a great buying opportunity, but for those with a five-year horizon, that may not be long enough to make money. (For more on ETFs, see Using ETFs To Build A Cost-Effective Portfolio.)
TUTORIAL: Stock Basics
The Bottom Line
Investment markets exist because there are people who like a certain investment, and there are people who hate it. It is this difference of opinion that creates both buyers and sellers. Any one of these investments may actually be appropriate for you, so make sure to evaluate each using your own standards.