Investments I am Avoiding in 2010

It’s curious to me, now that stock markets around the world have recovered some 35-50% from their lows last March, a number of so-called financial advisers are now advising their clients to shift into stocks. The main problem that I have with these personal financial advisers is that most of their advice tends to be on the buy side. Very rarely do they counsel people on what investments to avoid, or when to sell and wait in the sidelines.  When the markets tanked, I saw a number of columns urging people to look at bonds, pointing out that the heavy losses were due to an over allocation to stocks.  While their past mistake may have been due to an overallocation to stocks, pulling money out of the market in Q1 of last year, would have resulted in missing out in a huge rally for the year.  In contrast, I thought I would point to the investment moves that I am avoiding.  As always, the following should be considered for amusement, not professional advisory purposes. This is what I will be avoiding or am approaching with more caution:

–High fee investment products — with the popularity of index funds and low fee ETF’s, high fee mutual funds and managed accounts are sticking out like more of a sore thumb than ever.  Just the other day, I received a solicitation to look at some high yield corporate bond mutual funds that had a management fee of around 1.5%.  Given that index mutual funds on high yield bonds can be found for around 30 basis points, this means that the high fee manager will have to outperform the index by over 1.2% each year, every year just to break even.  Many annuity and insurance company products have similar high fees.  As I had mentioned in a previous post, this is the primary reason, I have the bulk of my investments in index funds and ETF’s.

–Splitting my accounts into too many providers — I used to think it was fun (and smart) to have lots of different accounts that allowed me to take advantage of special offers, teasers and bonuses.  Now, I find, that having my investments relatively consolidated helps me to keep track of them and helps me to avoid having to read the small print of when an account fee might step up or services change.

–Investments that were the top performer of last year — unless they are part of a long-term secular trend.  Last year’s top performers included emerging markets, high yield debt, and precious metals.  I have holdings in all three, but have stopped adding to them.

–Investments that only have a track record in limited markets — I’m thinking particularly of things like certain alternative investments that become the flavor of the month from time to time and a short track record.

shared at this week’s Carnival of Personal Finance