I've reviewed hundreds of portfolios. Here are 3 of the worst investments I've seen.

Ron Wayne was Apple’s third founder, owner of a 10% stake in the company. For completely rough numbers, that’s 10% of a $2.68 trillion company (Yes, I’m ignoring dilution). Not too shabby, right?

Oh, I forgot to mention one tiny detail.

Ron Wayne sold his entire stake for $800.

Is this the biggest miss of all time? Possibly. It’s definitely up there.

Today I’m going to talk about terrible investment decisions of a different sort.

Instead of bad stock choices, I’m going to talk about the worst investment products that I’ve seen actually seen. Instead of giving investment advice on what you should buy, I’m going to tell you what to avoid.

So, what are my least favorite investments?

• Leveraged ETFs
• Annuities (Not all, but many)
• Loaded Mutual Funds

Keep reading for the reasoning behind each option.

Leveraged ETFs

Leveraged ETFs aren’t inherently bad, unlike some of the other options here. The problem is that most investors don’t understand them, leading them to be misused. I’ve heard plenty of other advisors talk about them without even understanding the risks.

First, what is a leveraged ETF? Simply, it’s an ETF that uses options to magnify returns of an index or stock.

For example, TQQQ provides a 3x return of the Nasdaq 100, on a daily basis.

In theory, that sounds great. The Nasdaq has averaged over 18% annually over the last ten years. Who wouldn’t want to triple that?

The problem is the daily basis part. That means the returns reset each day, rather than monthly or annually. Leverage magnifies gains, but it also magnifies losses on the days the index is down.

Looking back at March 2020, we can see the difference this leverage can make over just a 3-day period.

The index was down 4% but the 3x leveraged fund was down significantly more.

The takeaway here is that leveraged ETFs are sophisticated tools for short-term investors. They’re not built for long-term investors.

Annuities

Not all annuities are bad.

What burns me up is when I see an annuity being sold on false pretenses.

I reviewed an annuity for a very nice couple recently and I couldn’t believe the gall of the insurance salesman.

• He used illustrations showing average rates of return that were materially higher than the highest rate offered by the insurance company. He was trying to sell the annuity using impossible returns.
• He stated that there were no fees in the annuity. A check of documents from the annuity company showed that to be false.
• He stated that the annuity would protect them from probate. In reality, these were annuities in an IRA. The account was already outside the probate estate via beneficiary elections.

To my point about bad investments, it’s not that annuities are inherently bad. The problem is when they’re used incorrectly or inappropriately. If you’re thinking of an annuity, here are the questions you should be asking.

• What type of annuity is this? (Variable, Fixed, MYGA, Fixed Indexed, and other options)
• What are the fees involved? (Ask to see a breakdown of Mortality, Expenses, & Administration fees, Investment Management fees, Rider fees, and Sub-Account expense ratios.)
• How are you compensated? (If they say they’re compensated by the insurance company, not you…that’s a red flag. The insurance company might write the check, but it’s funded by your dollars.)
• What happens to my income if the market drops? (The answer depends on the type of annuity and specific income riders, but you want to know the answer to this either way.)
• What are the surrender terms? (Essentially, what is the penalty if you decide you don’t like the product and want to sell it. Some annuities have surrender periods that last up to 14 years and have penalties above 10%.)
• Will my annuity income change throughout retirement? (If your income stays the same, inflation will gradually reduce your buying power.)
• What are my other options for retirement income and why did you suggest an annuity instead of the others? (There are times an annuity is the best option. Occasionally, but still. You should definitely understand the other options, as well as the tradeoffs involved.

The takeaway here is that you need to understand both how the product works and why it's your best option before you buy an annuity.

Loaded Mutual Funds

This one is short and simple. Loads are just commissions paid to buy a fund.

There’s almost no reason to buy a mutual fund that has a load (aka commission). I honestly can’t think of a single reason to buy them, but I might be missing something so I’ll hedge myself and say almost no reason.

In the past, loaded funds were common. These were typically A Shares or C Shares, depending on the type of load.

· A Shares have an up-front charge, up to 5.75%, then a lower ongoing cost.

· C Shares have no up-front charge, but they have a higher ongoing cost of 1.5-2% annually. These were often sold because the advisor received ~1% of the fee each year but the client didn’t actually see the fee on their statement.

These days, you can trade stocks and ETFs without a commission through brokerages like Schwab, Fidelity, or Vanguard. There’s basically no reason to pay a commission to access a mutual fund. Even actively managed mutual funds can often be purchased without a load through NTF (No-Transaction Fee) funds at the major brokerages.

I should mention, not all A Share funds are loaded funds. Some advisors use commission-free (load-waived) A Shares in their portfolios. These are fine.

If you’re buying an A Share fund with a 5.75% load, that means that only 94.25% of each dollar is being invested. You have to make 6.1% before you’re back where you started.

If someone is pushing an A Share fund on you, it’s probably because they aren’t licensed to offer anything else and you should ask more questions.

The takeaway here is that commissions are rarely in your best interest. You should be asking questions if recommended investments that include a commission.

That's it for now! If you know someone considering one of these investments...forward them a copy of this email. It might save them some headache. If you already own one of these, I'm happy to walk you through your options going forward.

Have a great week!

Jeb

P.S. I'm hosting my live, monthly economic and market update next Tuesday at noon. You can register by clicking this link.