It is important to realize that investing is not an exact science. Even though some seem to make money in whatever they invest, others seem to lose whenever they invest in anything.
The simplest, most straightforward method for evaluating any investment is the percentage of people who buy into it and get their money back.
The next rule of thumb is how many make returns above their investments. Generally, if investments make more money than they cost, they can be considered good investments. Most successful investors are what can be called hedged risk-takers. That means that they will take risks periodically if they can afford to, but they never take more risks than are considered necessary to accomplish their goals. Although there are investments that historically have reaped more financial rewards than financial disasters, many others are nothing more than bottomless pits that continually feed the never-quenched thirst of speculation. They seem always to promise great returns but seldom seem to deliver.
This article does not presume to give investment advice. Based on past performance, it merely points out and draws attention to what investments over the years have been most likely to produce financial gains and those that have been mostly likely to produce financial disappointments or losses. Although past performance does not necessarily guarantee the same showing for the future, it does provide a standard by which nonprofessional investors can judge whether an investment is historically financially safe or detrimental. So, based on the fact that these best and worst investments are not intended to be used as guidelines for developing investment strategies but, rather, are to be viewed as investment suggestions based on past performance, we submit the following investment options.
1. Residential housing. Without question, the best overall investment for the majority of Americans has been their homes. Residential housing has kept pace with inflation; in addition, it has appreciated on the average approximately 4 percent annually. A simple investment plan to follow is to make the ownership of your home your first investment priority.
2. Rental properties. It is often said that the thing you know best you do best. The majority of Americans know how to evaluate rental properties, particularly residential housing. Therefore, they are a logical investment. However, rental properties are not for everybody. Unless you have a strong personality and are willing to evict some nonpaying tenants from time to time, you need to avoid becoming a landlord. However, one of the attractive aspects of rental property is that the initial investment is not excessively large in many areas. In addition, once the property is rented the tenants pay off the mortgage for you.
3. Mutual funds. The whole concept of mutual funds is designed to attract the average investor. The pooling of a large number of small investors’ monies to buy a broad diversity of stocks and other securities is a simple way of spreading the risks. Mutual funds are good investments because (1) most allow small incremental investments, (2) they provide professional investment management, and (3) they allow great flexibility through the shifting of funds between a variety of investment assets.
4. Insurance products. With the dual benefit of insurance coverage plus higher yields, insurance products such as annuities and whole-life insurance have become viable products for long-term investors.
5. Company retirement plans. The investments available through a company retirement plan are the same as those you might choose personally. One major advantage with company-sponsored retirement plans is that usually the funds are tax deferred. Additionally, many companies offer matching funds based on a percentage of what you elect to invest yourself.
6. Government-backed securities. Government-backed investments are considered to be absolute security. Although they may not be the best performers, they are without a doubt the most secure.
1. Commodities speculation. Commodities trading is the buying and selling of materials for future delivery. It is extremely risky. Unless you have the understanding that everything you have worked for most of your life can be lost while you sleep and the thought of that possibility is irrelevant to you with regard to your life and lifestyle, don’t trade commodities.
2. Partnerships. The most common financial partnerships are limited partnerships, meaning that the contractual arrangement specifies a general partner and one or more limited partners. The intent is to limit the liability of the limited partners to their financial investments only. However, because of recaptured deferred taxes, seldom do investors recoup their initial investments in the length of time originally proposed, if ever.
3. Tax shelters. Tax shelters are used primarily to defer income taxes, rather than for any economic value they might have. Since the 1986 Tax Reform Act, tax shelters for the average investor have been curtailed. Generally, the only people who can be profitable in tax shelter investments are those who have a large amount of passive income, rather than earned income. So, for the average American worker, tax shelters are not recommended.
4. Precious metals. Most people who make any money at all on precious metals are those who sell them. Unless you have a lot of money that you can afford to lose, don’t invest in precious metals. Investing in precious metals is like taking a handful of money and throwing it into the wind and then hoping that some of it will eventually return to you, along with more money that others have thrown to the wind.
5. Gemstones. The diamond on your finger is not an investment; it’s a keepsake. Most novice gem speculators usually buy high and sell low. Gem investing is for those who have nerves of steel, the strong at heart, and the rich. Seldom do investors make any money in gems, unless they are one of a small group of international gem professionals or gem collectors.
6. Collectibles. Coins, stamps, books, porcelain, works of art, and other unique items can be good investments for knowledgeable buyers who take the time and effort to become proficient at their trade or for those who collect such items as a hobby or for leisure. However, for the average non-professional collectibles investor, the market is extremely limited and slow moving—neither worth the time nor the effort when compared to the limited financial rewards.
7. Stocks. Although the knowledgeable, professional investors can and do make money regularly on common stock, average investors are not equipped to speculate accurately on which stock will do well and which will not. If the average investor would invest in a common stock, leave it for 10 years, and not touch it, it probably would keep up with inflation and perhaps even gain 3 or 4 percent. Seldom do average investors do that. They generally try to move their investments from stock to stock in order to reap the maximum benefits. Since they are not professionals and their knowledge is limited, most end up making little and, in many cases, losing their initial investment.
Although we are not qualified to give professional investment advice, we can present information that suggests what have been the best and worst investment options, based on past performance. We are not suggesting that you invest in the best and avoid the worst. We only propose that you consider these findings (along with prayer and seeking counsel from a trusted investment professional) before you make your investment decisions.
Information for this article was taken from Larry Burkett’s Investing for the Future, Chapters 5 and 6, ChariotVictor, 1999.
Originally posted 10/22/2012
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