Investments You'll Never Need

by Alan Lavine and Gail Liberman

One of our favorite personal finance primers is, “The Only Investment Guide You’ll Ever Need (Harvest Books)” by Andrew Tobias.

This fun-to-read book truly tells it like it is when it comes to your money.

But there are a whole lot of investments you’ll likely never need. Here’s our personal list.

• Anything you have to feed. Examples: Racehorses and greyhounds. Put your money into these, and it had better be because you enjoy it! Don’t expect big profits from siring a Kentucky Derby winner. Animals get sick, injured and require tons of care. Your chances of owning a winner are about one in one million.
• Hot stocks. The general rule on stocks is if they don’t go up, don’t buy them. But because you don’t have this knowledge ahead of time, you’re generally better off staying clear of heavily hyped individual stock picks. Buy on rumor and sell on news, and you can lose your shirt. There are exceptions to every rule—as Las Vegas gamblers can testify. But no one can time the stock market with any success over the long term. Just ask all the day traders who lost a fortune in the tech stock crash of 2000!
• Junk bonds or high-yield bonds. These bonds are issued by companies with poor credit ratings of less than BBB by Standard & Poor’s. If you invest in high-yield bonds, at least consider a mutual fund or exchange traded fund, so that you own lots of issuers. This way, if some of the bonds default, your investment is not wiped out. In periods of economic recession, junk bond funds have lost 20 percent or more, according to Morningstar Inc., Chicago.
• No-money-down real estate. The only people making money on this scheme are the ones who run seminars and publish books on the subject. As many currently are starting to learn the hard way, no-money-down real estate can backfire when the real estate market heads south and you need to sell.
• Collectibles. Don’t get us wrong. These are fun to own, and interesting to look at. But don’t buy them to make fat profits unless you’re an antique expert. Try selling this stuff. If you’re lucky, you’ll get back what you paid for it.

There are a couple of other investments that come close to making our list. But in certain cases, they may have some redeeming value.

Take one of the most costly financial services--life insurance. This typically is a bad investment, when you consider commissions, mortality and expense charges, administrative charges and any premium taxes. On the other hand, it could be worth it in certain cases if you buy just enough—not as an investment, but to protect your loved ones when you are not around.

Variable annuities let you invest tax-deferred in securities, but guarantee that when you die, your heirs will get the greater of the market value or your original investment. The problem: These investments charge fees of more than 2 percent annually. They also charge back-end surrender fees if you cash out early. Plus, many annuities restrict your investments. Some even require that you invest for at least 10 years before they’ll guarantee your principal.

One other major drawback: You’ll owe ordinary income taxes—which can run as high as 35 percent--on your profits when you cash out your variable annuity.

By contrast, invest in stocks for more than one year, and you’ll only owe capital gains taxes on just 15 percent of your profits.

Having said that, there are, if you shop around, some deferred variable annuities with lower fees that could be worth it if you’ve already maxed out on other tax-advantaged retirement accounts.

In fact, we have one of the lowest-cost deferred variable annuities, which we expect, down the road, will help provide us periodic income for life.

 Alan Lavine and Gail Liberman are husband-wife personal finance columnists, journalists and authors. They are the authors of "Rags To Retirement," published by Alpha Books. Their columns appear in newspapers throughout New England and the Southeast, as well as online. Their commentary on mutual funds and personal finance is carried by 200 radio stations nationwide every Sunday over Business News Network's Charles DeRose Financial Advisor Show. Al and Gail’s new book is "Rags To Retirement:  Stories from people who retired well on much less than you think," published by Alpha Books.

More articles by Al and Gail can be found here.