The 5 Most Overrated Investments

When it comes to investing, everybody has a hot thing. I can’t walk into the guy’s locker room at the gym without hearing someone telling their buddy about their most sexy investment.

Unfortunately, sexy doesn’t always equal results. You have to know which rocks are worth looking under and which to avoid.

I sometimes play golf with my son or a friend. I’m not a good golfer. I’m not even “kinda” bad. I stink. However, I stink a lot less when I follow one rule: stay out of trouble.

It seems that the first few times I golf every year I find myself hitting shots that screw up my game. I’ll hit one in the weeds. Then, because I can’t get to my ball very well, I dribble the next shot into the bunker. Bad shots create additional bad shots. Just staying out of trouble can improve your game immensely.

It’s the same with investing.

By staying away from the trouble investments, you’ll do yourself proud. Here are five that can get mirky in a hurry:

1. Gold. I know….you’re thinking I’m totally a “do as I say, not what I do” guy….and it’s true. I’m in a mining stock and I’m up big in my Grow Your Dough Challenge portfolio. However, gold is an ugly investment over time. Listen to these numbers: gold funds are up 84% over the last 20 years, which sounds good until you realize that the old, boring S&P 500 is up 517% over the same period.
2. Technology stocks. Technology investments are so, so, so difficult to predict. On one hand, tech is the promise of the future, but technology moves so quickly that it’s nearly impossible to predict which new application is going to succeed. I often had clients tell me that they had heard about a little company with a neat product (one client thought it was great that a father and his two sons were running a company offering broadband internet around the Columbus, Ohio area and thought that they’d be the next big thing. That was 1998 and he was sure they’d some day compete with AOL. Yeah…..) Sadly, most people I know who “throw long” on these types of investments are in debt up to their eyeballs….
3. Short Term Real Estate. It isn’t that there isn’t good money to be made in real estate…it’s just that purchasing real estate to flip is more difficult than the “gurus” might have you believe.
4. New Drug stocks. Here’s the deal about new drugs….you have to know what the FDA is going to think next, and that even won’t ensure that your drug will be a hit. When you look at medical firms, betting with small biotechs is a difficult place to
5. IPOs – Hmmm….there are lots of companies out there that have proven track records and consistent results and you want to bet your fortunes on one that’s never yet shown investors anything? Why? The roulette wheel isn’t risky enough for you?

With the exception of real estate, the rest of these investments are less about investing than they are gambling. To some degree, investing IS gambling, but different than the average guy sitting down at a slot machine, you have to first increase your odds that you’ll pick a winner. Maybe you can find a tech company that’s a winner, but you won’t do it by just believing your neighbor who heard it from his boss’s friend.

Want more on this topic?

My favorite read about “hot” investments is Stock Market Wizards: Interviews with America’s Top Stock Traders.
Here’s the point: there’s a LOT of work that goes into being someone that tries to actively trade the market. You probably don’t have the time, and even if you did….you still probably won’t win. (Still, it’s fascinating reading about these pros).

We talk about overrated investments on our old 2 Guys & Your Money podcast: The Most Overrated Investments.

Photo: Mark Ou