The financial industry is constantly turning out new products. Many of these are originally designed for one purpose, but then used for a different purpose. For example, Credit Default Swaps were designed to protect banks from large numbers of defaults on home loans. The trouble is that banks and financial firms started creating them like water and selling billions of dollars worth of these insurance policies without the money needed to back them. Imagine selling a home insurance policy to every house in your neighborhood with only the cash in your pockets to back it – works great unless there is a tornado that wipes out all of the houses at once.
Here are some products small investors should never buy:
Options- These are designed to protect a stock position from a fall. Buying them for speculation will result in losing a lot of money since you have to be right in both the timing and the direction of future moves.
Stocks for speculation – Buy companies for the long-term. Don’t try to buy stocks short-term based on price movements. You will either lag the market or lose money outright over time
Double and Triple ETFs – These funds try to provide double or triple the moves made by major indexes. The trouble is if the index moves up and down repeatedly you can lose money even if the index goes in the direction you expect.
US Government Savings Bonds – These have always paid low-interest rates, but at least they used to come with a guaranteed rate. Now they don’t guarantee anything, and they are a pain to redeem. Plus, have you seen the size of the deficit lately?
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Disclaimer: This blog is not meant to give financial planning or tax advice. It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.
Picture Credits: Pierre Amerlynck , Downloaded from stock.xchng