Investments have always been touted as key implements of gaining financial stability. The media hype surrounding age and investment often compels people to rush into the sector without having any idea about the drawbacks and repercussions of bad investments. The idea about toxic investments was demonstrated during the 2008 financial crisis where some highly revered investments were rendered worthless. For instance, chip stocks like AIG were rendered worthless during this crisis. This compelled the Federal government to intervene and buy the stocks before they affected the companies financial status and ultimately the country’s economic well being.
There have been a number of financial crises that have demonstrated the severe impact of toxic investments on personal liquidity and financial well-being. Most of these crises have been preceded by globally-altering events like the Great depression which was preceded by the stock market crash of 1929.
Learning from such events and trends makes us better investors and prepares us for any eventualities. It can be argued that the current pandemic is a global-altering event that may have a significant impact on the investing sector. Some experts have argued that this pandemic may cause a subsequent financial crisis that may take years to recover from. It is because of such ideas that we should prepare for a possible financial crisis and consider the toxic investments, in our portfolio or ones that we intend to buy, to avoid the risk of financial insolvency.
Avoiding bad investments does not only make us shrewd investors but also helps us safeguard our future in troubled times. That being said, some of the investments listed in this article may already be in some of your financial portfolios. Do not take this as a sign of failure but as an incentive to research into how these investments have been predicted to work out in the upcoming future.
It is also important to note that most of these listed investments are touted as toxic investments based on a number of factors including how they have performed in the previous financial crisis. This should not be taken as a conclusive indicator that they will underperform in the upcoming fiscal year but as a reminder that we should pay close attention to our financial portfolio to weed out toxic investments and avoid the risk of acquiring toxic ones.
That being said, here is a list of investments that you should avoid or pay close attention to in the upcoming fiscal year.
Subprime mortgages are the kind of mortgages taken out by individuals with low credit scores, usually 640 or less- and more often than not below 600. These mortgages are taken out as a substitute for conventional mortgages because of the lack of credit worthiness. These mortgages come with higher interest rates than conventional ones because of the lack of guarantee of payment from the borrower. These mortgages come with a lot of risk for the lender because of the fact that subprime mortgage borrowers are more likely to default on the loan payments. Additionally, the current pandemic implies an underlying financial constraint for most families which doubles the risk associated with such mortgages.
Why are Subprime Mortgages Bad Investments in 2021?
The current pandemic has forced various commercial and financial institutions to make concessions in regards to financial implements. These concessions triple the risk associated with some of these investments. In this case, interest rate concessions can be made for subprime mortgages which enhances the risk of lower return while compounding the risk of default by the borrower. Let’s say for instance, a subprime mortgager took out this kind of loan and decided to rent out the house. However, during this pandemic, some states have outlawed eviction of non-paying tenants. As such, this mortgager is forced to default on the loan which already came with a higher risk of default. Such scenarios make this form of investment a toxic one that can challenge your financial well-being.
Variable life insurance policies
Variable life insurance is a type of premium life insurance coverage that comes with a range of separate accounts and a number of investment funds. These kinds of insurance policies come with three main components that include the death benefit, cash value, and premiums. Variable life insurance policies are regarded as securities contracts because of the underlying risk of each separate entity. Most investors consider getting these forms of insurance because of the tax deferrals on accumulated earnings, ability of the policyholder to access the cash value through tax free loans as long as the policy is still enforced, and the flexibility of the premium remittance and cash value accumulation.
Why are Variable life insurance policies Bad Investments in 2021?
Variable life insurance policies are considered toxic because of some of their major drawbacks including the high fees associated with maintaining the policy including mortality and expense risk charges, sales and administrative fees because these policies are considered SEC regulated investments, investment management fees, and surrender fees amongst others. These kinds of policies also do not have a guaranteed rate of return. Additionally, during declining market conditions, like the one experienced in 2020, the cash value of such policies can dwindle thereby rendering your investment toxic because of the lack of cash value. Lastly, the greatest risk that contributes to this investment being considered a toxic one is that the policyholder assumes the full risk of investment. The insurance companies do not guarantee any rate of return and also offer no form of protection against losses.
Penny stocks denote the stocks of companies that trade for less than $5 per share. This may seem like a good investment for a beginner but they come with some risks, particularly in a year where the threat of financial recession is increased with the global pandemic. Penny stocks are commonly associated with small companies that trade infrequently. This implies that these companies lack liquidity or willing buyers in the stock market which is a sign of a toxic investment. Investors often find it hard to offload these kinds of stocks because of the lack of willing buyers. Additionally, owners of penny stocks often find it hard to price the stocks with a value that accurately reflects the market conditions.
Why are Penny Stocks Bad Investments in 2021?
Penny stocks trade at cheaper prices which may be an indication of a failing company that may end up filing for bankruptcy. Additionally, these stocks are regarded as highly speculative because of their lack of liquidity, wide bid-ask spreads or price quotes, are subject to market manipulation by barkers looking to offload them, and small company sizes. In 2021, many of these small companies have been adversely affected by the pandemic. While some have managed to access financial implements to help them weather the crisis caused by the pandemic, others have failed to transition from a physical to an online marketplace. This makes these stocks bad investments because the risk associated with company failure have been compounded with the pandemic.
Non-Traded Real Estate Investment Trusts (REITs)
Non-traded REITs refer to real estate investments that are not listed on public exchanges and are designed to reduce or eliminate tax while providing returns for the investor. The most common source of income from these kinds of investments is through rent. Since these kinds of REITs do not trade on the securities exchange, they often chrome illiquid for longer periods. Furthermore, the investor often does not have an idea on the kind of properties that the REIT invests on. This is because most of the properties procured through non-traded REITs are done from a blind pool which compounds the risk associated with them.
Why are Non-Traded Real Estate Investment Trusts Bad Investments in 2021?
The fact that the main form of income or return is gained from rent makes this a toxic investment in 2021. This is because the current pandemic has heightened the risk associated with rent defaulters. Additionally, if an investor wants to redeem their returns earlier than planned, they have to contend with high fees which reduces the overall returns associated with the investment. The fact that these types of investments can remain illiquid for a longer period also implies that distribution of returns is not guaranteed. As such, at the beginning, most of the distributions amongst shareholders comes from the capital invested which also affects the return on investment.
High Yield Bonds
High yield bonds also referred to as junk bonds denote bonds that come with higher interest rates because they are often issued by organizations that have poor or low credit worth. Most investors often include these types of bonds in their portfolios because of the possibility of higher returns on investment. However, junk bonds are more likely to default and display a higher price volatility than other types of bonds. Furthermore, these bonds come with shorter maturities meaning that the company or issue of the bond can take advantage of lower funding rates and recall the bonds if their credit rating improves.
Why are High Yield Bonds Bad Investments in 2021?
Companies with low credit rating are comparable to individuals with lower credit ratings. As such, they are highly likely to default on their loan payments and in some cases file for bankruptcy. In such a scenario, you will lose all your investment. This makes these forms of bonds toxic investments in 2021 because of the decline in economic activity in some sectors. Additionally, the fact that the company can use their increasing credit worthiness to shortchange investors means that you will bear the full risk of the investment. Additionally, the high price volatility may work against you in a declining market.
The investor-worthiness of hedge funds is two sided. These funds are offered as alternative investment implements that use pooled funds to gain returns for the investors. Hedge funds are complex names to investment partnerships where the hedge fund company or manager invests aggressively in a range of financial products. The management of these pools is based on the combined implementation of a number of different strategies to provide higher returns for investors. Most hedge funds prefer trading in relatively liquid assets that may either work for or against the investor. The most common strategies used include long-short equity, market neutral, volatility arbitrage, and merger arbitrage and are often only accessible to accredited investors.
Why are Hedge funds Bad Investments in 2021?
Hedge funds are considered bad investments in 2021 because the potential losses can be significant due to the aggressiveness of the trading. This risk has been exacerbated with the threat of a financial crisis that has seen the market decline in the past financial quarters in 2020. These funds also come with less liquidity than standard mutual funds and investors are often required to lock the funds for a period of years. With the assumption of an imminent financial crisis, it means that during the years when your funds are locked up you could end up making significant losses that can permanently damage your financial stability.
Private placements denote the trading of securities (sale of stocks or bonds) that are often not sold on public offering but through private ones. To be able to gain access into these private offerings, one must be an accredited investor which comes with a high personal asset value. The SEC defines accredited investors as those who have an income that exceeds $200,000 or combined income of $300,000 with a spouse in the last two years with exce[tion of the current year one intends to invest. The main advantage of this form of investment is lower regulatory requirements that may see an investor begin trading faster than in other financial securities.
Why are Private Placements Bad Investments in 2021?
The duality of this form of investment makes it hard to concretely label it as atoxic investment. This is because there are certain situations where they are better options for investors looking to expand their portfolio and those that have personal assets to fall back on. However, for a regular investor who just attained the financial requirement needed to be listed as an accredited investor, these can be toxic investments. This is because these types of investors do not have access to information regarding the traded stocks and assets. Additionally, these placements are liable to manipulation by brokers who are looking to offset stock that may be declining in performance. The selling of private placements is also complicated as it requires an investor who has access to the private offering.
Commodities trading refers to the exchange or trade of assets based on the price of an underlying physical commodity. Theoretically, commodities offer investors an opportunity of diversifying their investment portfolio and minimizing risk. The most common commodities traded are classified into four categories including metal, energy, livestock and meat, and agricultural. While these commodities often come with a higher predicted rate of return, they also have underlying issues that compound their risks. Commodities have higher price volatility because their prices are influenced by market supply and demand that is often influenced by a number of unexpected or unpredicted events like natural calamities.
Why are Commodities trading Bad Investments in 2021?
Commodities trident are toxic investments in 2021. As mentioned earlier, these investment options are largely influenced by uncertain events like the current global pandemic. For instance, in 2020, a barrel of oil once traded for less than a dollar. While this has increased, the risk associated with trading such commodities still exists. Furthermore, the current pandemic forced most countries to lock their borders. This cessation of goods and services into various countries meant that these countries had to find alternatives to some commodities. This may drastically affect the cost of such goods which renders such investments toxic.
Regular Savings Accounts
Savings accounts are often viewed as sources of regular passive income that comes from the consistent interest rates provided by banks. These savings accounts come with a range of features that each provide different interesting interest and insurance coverage packages. In most cases, the interest rates provided by these banks are varied or standardized across the country and often regulated by a national standard. While this type of investment can be viewed as the text-book case for a regular and secure source of passive income, it can also be considered a bad investment in 2021 because of some underlying drawbacks.
Why are Regular Savings Accounts Bad Investments in 2021?
While savings accounts are not as toxic as some of the other investment options listed in this article, they come with some significant drawbacks that may affect your financial stability. The first drawback is their low interest rate. Savings accounts provide consistent returns but at significantly lower interest rates sthan other fiscal implements. This means that you may invest your money to gain low returns that you could have otherwise doubled or tripled with other investments. This drawback contributes to the second issue with these accounts which is the time constraint applied on all savings. In most savings accounts, you are only paid returns if the money is saved for a specified period of time. Lastly, when you factor in issues like declining economic situations and inflation, the money you have saved does not work to your benefit.
Options and futures trading
Options and futures are considered comparable investment options that provide an investor with the chance to make money and hedge current investments. Options provide the investor with the right but not the obligation to buy or sell an asset at a specific time during the progression of the contract. On the other hand, futures give investors the obligation to purchase specific assets which can be delivered at a specific future date unless the holder’s position is closed prior to expiration. Futures, combined with options, are often considered low-risk ways of assessing and approaching future markets. For instance, let’s say as an investor you expect the price of gold futures to move high over a certain future period, say 3 or 4 months. You then purchase an option that is based on the presumption of an increase in price.
Why are Options and futures trading Bad Investments in 2021?
The profitability of futures and option contracts is based on the prediction of future prices. However, the current stock market is uncertain because of the uncertainty of the pandemic. As many countries begin 2021 with lockdowns and curfews, it is not determined whether the situation will be alleviated or will worsen. As such, investing in such options purely based on the speculation of an increase in price of an asset is a toxic investment that can tamper with your financial stability. While your prediction may turn out to be right, there are a number of uncertainties that may influence the outcome.
The Investment Someone you know Just Doubled His Money On
This is a common mistake that most beginner investors make. You may have come across articles describing how someone made a fortune selling a stock which he bought on low or be influenced by a relative or friend who made an investment that just doubled. In other cases, you get introduced to pyramid schemes with the hope that you will be able to make money as your relative or friend did. For instance, there have been a few pyramid schemes in the cosmetics industry where stay-at-home moms were influenced by people in their circle to join with the hopes of doubling their income. These moms were then made to pay “a franchise” fee and ended up with subpar products that could not be sold. These are examples of bad investments that should not be tolerated in 2021.
Why are “Investment Someone you know Just Doubled His Money On” Bad Investments in 2021?
Regardless of whether or not your neighbor or relative managed to double his money on stock options or MLM schemes, buying into the same scheme is often a bad idea. For instance, let’s assume your neighbor comes and tells you that he bought bitcoin when it was low and sold it at its highest prices. You are tempted to buy and end up purchasing it at its high price. A few weeks later the cryptocurrency crashes and you end up losing money that could have otherwise been appropriated into safer investment options. Buying into a stock because it doubled is toxic investment because it, more often than not, has reached its optimum price and may decline in a few days or months. This does not mean that you should abstain from investing in assets that show promise of increase. However, you should limit your investment choice to information regarding the particular asset and not family or friend influence.
Derivatives denote securities that generate their values from underlying assets. These types of investments are often used to guarantee the balanced exchange rates of goods traded across borders, hedge positions, speculate on the directional movement of the underlying asset, or give leverage to holdings. As such, their value is derived from the price fluctuation of the underlying asset. Some common derivatives include aforementioned futures and options, forwards, and swaps. In this instance, we shall discuss investing in forwards and swaps. These derivatives have increased risks and possibility for higher returns on investments which often sways the investor in purchasing them.
Why are derivatives Bad Investments in 2021?
Derivatives are bad investments in 2021 because of some major drawbacks that have been amplified with the current pandemic. The first drawback is the difficulty in valuing the implement because of its dependency on a number of uncertain factors. The second drawback is that derivatives are subject to counterparty default when purchased over the counter. This can result in the loss of initial investment amount. Lastly, derivatives are significantly reliant on supply and demand which makes them subject to the declining economic conditions caused by the global pandemic. Buying into these investment options comes with a higher risk of low or no returns.
Promised Returns with higher than average returns
This is similar to the aforementioned family-influenced investment options. You have probably come across advertisements or ads that promise to double your initial capital or provide a higher than average rate of return on your investment. Such investments come with scardce details regarding the assets that will be traded on or often provide vague details regarding the opportunity. Due to the expansivity of the internet, some of the promoters of these dubious opportunities may convince you that they are backed by the government or accredited by federal organizations. This can be enticing to someone looking to expand their portfolio or looking for a new way of earning passive income. However, more often than note, they turn out to be scams.
Why are Promised Returns with higher than average returns Bad Investments in 2021?
Such investments are poster child for toxic and bad investments. Firstly, there are no legal or accredited investment options or financial organizations that can guarantee these levels of returns. While some of these organizations may be insured and some accredited, none can guarantee double digit returns or provide consistent higher than average returns on interest. To conceptualize how toxic these investments are, think about it this way: if investing $100 or $2000 could guarantee $200 or $4000 consistent returns would it not be easier for anyone to become rich? You might argue that most people do not know about these options but they are, in most cases, scams run in overseas locations.
PIPES (Private Investments in Public Equity)
Private investment in public equity (PIPE) denotes the procurement of shares of publicly traded stocks at prices and values that are beneath the current market value. This kind of stock buying strategy is common amongst investment firms, mutual funds, and other large, accredited investors. Conventional PIPES are ones where common or preferred stocks are issued at prices set by the investor. On the other hand, structured PIPES occur when common or preferred stocks are issued as shares of convertible debts. These forms of investment are considered lucrative because they are obtained at discounted prices. However, they come with some underlying drawbacks for a beginner investor.
Why are PIPES (Private Investments in Public Equity) Bad Investments in 2021?
The largest drawback of this form of investment is the fact that they dilute the share value for current shareholders. This discounted share price means less money for the company. PIPES are also only accessible to investors who are accredited. This means that you need to have a certain level of personal fiscal assets to be able to purchase these assets.
The Nigerian Prince
While this may sound cliché, people still fall for the Nigerian prince scam. The scam often targets innocent people who get emails from Nigerian princes who have millions of dollars locked in overseas countries. They often need help in getting this money and may require you to send them some money to access their “inheritance.” In return, this prince offers a piece of the dubious inheritance. This is one of the most common scenarios for the same with others targeting lonely people online. The scammers often come with compelling stories and in some cases use threats and intimidation. Similar scams include Indian call center scams where people are duped into providing their personal financial information.
Why are Nigerian Prince Scams Bad Investments in 2021?
While the Nigerian prince was one of the most popular internet email scams, there have been several variations of this scam. Most of these investment-related scams promise greater returns which are often lies. Never invest in an idea or option that you do not have information on. Additionally, always be wary of unsolicited investment options because, in most cases, they are scams which have targeted you based on your online presence. Lastly, providing your personal financial information like bank details to individuals who you do not know is always a bad idea. Safeguard your assets just as you expect legitimate financial institutions to safeguard your investments.
Investing is a good option for safeguarding your financial stability and wellbeing. However, not all investments should be considered as viable ways of making consistent and passive returns. while some of the aforementioned investment implements come with a dual side of good returns, they should be thoroughly investigated before you decide to put your money into their structures.
Disclaimer: The opinions expressed in the Savvy Worker Blog are intended for general informational purposes only and are not to provide specific advice or recommendations for any individual or on any specific security or investment product. It is only intended to provide education about the financial industry. The views reflected in the commentary are subject to change at any time without notice.