March 14 2010|11.00 AM UTC

Silicon Valley Blogger

Five Investments To Avoid For The Long Term

Category: Personal FinanceTags: , ,

This guest post is brought to you by SVB of The Digerati Life, a site that covers personal finance, ranging from reviews of online discount brokers to effective debt reduction strategies.

So you’re finally ready to invest for the long term and ready to receive a higher return on your money. The catch is that you’ll need to keep it somewhere for at least 5 years to really experience the benefit of long term growth on your assets.

If you’re ready to seek long term growth for your investment portfolio, then I’d like to point out those investments that you may want to avoid. The thing is, there are investments that are applicable for different purposes, and there are a few that may not fit your needs as a long term investor. For instance, many investments do not pay enough in interest to cover inflation and taxes on the interest you accrue. The rule of thumb is this: you want to receive returns that are higher than 6% on your long-term investments. Anything that yields 6% or lower in overall returns may not be as worthwhile because those returns are eaten up by taxes and inflation. That said, here is a list of the top five long-term investments you should avoid.

1. Savings Accounts

Online savings products like the ones described in this Ally Bank review are terrific repositories for your emergency fund or for money that you may need to get to quickly. However, in general, savings accounts yield very little interest, not even enough to really produce a gain after you pay taxes. Therefore, you want to limit the use of these types of accounts for your long term investing. If you plan to establish an emergency fund, then attempt to find a reputable online savings account or an account that offers a high yield with ease of access, through a credit union or bank.

2. Certificates of Deposit

A certificate of deposit is just that, a deposit for which you have a certificate. The interest rates on these types of investments may be slightly higher than a savings account because you agree (in the certificate) not to touch the money for a set amount of time. If you withdraw your money before your CD matures, you’ll pay a penalty. Typically, the interest rates on these types of investments are not higher than 6% — in fact, these days, you’d be lucky to receive 3% on them. Occasionally, you will see rates rise, but they hardly stay above 6% for any significant length of time, give that these rates are invariably linked to the economic environment. If you’re interested, you can find certificates of deposit at most banks and credit unions.

3. Money Market Accounts

Money market funds or accounts are similar to savings accounts. These are investment accounts that invest in low risk mutual funds. With these accounts, you usually receive a checkbook so you can access the money quickly, if needed. Like with savings accounts, these are great accounts for emergency funds, from which you can access your money quickly, if necessary. Typically, the interest rates on these accounts are higher than a savings account, which makes them a good option for your cash position.

4. Bonds

A bond is an investment vehicle that allows you to lend money to a company or other entity. The company views this as a debt owed to you. The return you receive on this investment is the fluctuation of the price of the bond plus the interest paid to you. Typically, bonds do not yield a very high return. Most people who buy bonds do so for the income stream and in order to manage the volatility of their overall investment portfolio.

5. Single Stocks

When you purchase a single stock, you are purchasing a fractional share of ownership in a company or business. If the company increases in value, you receive a return on your investment. This is great if the company does well, and not so great if they falter. Ordinarily, small investors may not do as well with trading or investing in single stocks if they are not actively involved with their investments. This type of investment carries some risk and should only be recommended to investors who can dedicate a good amount of time to stock and investment research. As an alternative, passive investors should think about investing in mutual funds and index funds to achieve diversification with their holdings and therefore, control their investment risks more effectively. Check with your online broker to find out more about applicable funds for your portfolio.

There is a plethora of investments offered in the market today. When choosing to invest in the long term, I prefer to go with mutual funds. I do a lot of preliminary research on a fund to ensure that I am investing in something that has a proven track record of yielding a 9% yearly rate of return or more. This provides me with a reasonable return even after taxes and inflation. When you invest for the long term, make sure that you are getting the most out of your money and aim for growth.

photo credit: pjchmiel

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{ 4 comments… read them below or add one }

Dawn/FFL March 14, 2010 at 11:18 am

What about single stocks that provide dividends? That seems like a smart investment even for the long term

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Dan March 14, 2010 at 12:17 pm

An interesting post but I would have to question the idea that you should invest in a mutual fund “that has a proven track record of yielding a 9% yearly rate of return or more.” Past results are not guarantees of future performance and that is a Madoff-type number that no sane mutual fund could guarantee. Much better off are low-cost diversified index funds.

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George F. McLaughlin CPA March 14, 2010 at 4:45 pm

Dawn,

Open an account with VANGUARD!!! You can receive free trades as well as utilize their own funds (Taxable and tax free).

Sincerely,

George F. McLaughlin CPA/MBA

Reply

ctreit March 15, 2010 at 7:17 am

I think it is difficult to make some general points like this, since every investment vehicle has a purpose for either time horizon.

I would definitely drop “single stock” from this list for three reasons. 1. Some employees end up with company stocks that remains in their accounts for the long-term, since they are restricted from selling it. While they want to diversify away from this company stock, they often cannot do so easily. 2. More importantly, there are some stocks that represent a cross section of industries like Berkshire or GE. When you buy a stock like that, you may get more diversification than you get with some mutual funds. 3. You can buy a groups of individual stocks in a number of different industries to spread your risk. In that case you kind of do what a mutual fund does except that you don’t have to pay the high fees these funds sometimes charge. Therefore, I don’t think it makes sense to exclude stocks per altogether.

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