A List of What Investors Should Never Do

This list is for purely educational purposes. 

And I’ve narrowed it down to “Nevers” that are universally accepted. 

You might find that you (or your advisor) have violated some of these.

If that’s the case, then I hope this serves as a guideline.

  1. Never buy a mutual fund that charges a sales fee to purchase it.  For example, some advisors like you to buy funds that cost up to a 6% sales charge just to get in.   That isn’t fair to the investor.  As an aggregate, funds charging purchase fees underperform funds that don’t charge purchase fees.  Can you think of why a salesperson might want a percentage of what you deposit?
  2. Never buy a mutual fund that costs you money to withdraw it.  In some cases, funds charge “back-end loads” ensuring that the salesperson/advisor is compensated a percentage of your assets if you sell the fund before a 5 year (or 7 year) period.  You don’t have to buy these funds.  Don’t let anyone convince you otherwise.  As an aggregate, they underperform funds that charge nothing to withdraw.
  3. Never sign a contract with a company ensuring that you will have to continue depositing a set amount of money each month/year.  Most of my readers will ask, “What company does that?” Let me just say that there’s one in Singapore, named after a Swiss city, where its representatives fleece unwary investors.  The same company also charges prohibitive sums if an investor needs their money for an emergency before their “contract term” is up.  These contract terms can last 20 years.  These businesses are not fair.  Watch out for them. 
  4. Never allow anyone to charge you a wrap fee or advisor’s fee to stuff actively managed mutual funds into your account.  I have seen some Raymond James representatives do this.  Don’t let them.  If you pay an annual fee of 1.75%, added with the hidden fees of actively managed funds (roughly 1.5%+) then you could lose money (when accounting for 3% inflation) even if the stock market marches ahead by 6% per year.

Can anyone else think of some “Nevers” for new investors?

 





Andrew Hallam

I’m a financial columnist for Canada’s national paper, The Globe and Mail, as well as for AssetBuilder, a financial service firm based in Texas. I’m also the author of Millionaire Teacher: The Nine Rules of Wealth You Should Have Learned in School (2nd Ed. Wiley 2017) and The Global Expatriate’s Guide To Investing: From Millionaire Teacher to Millionaire Expat (Wiley 2015). My mission is to educate, motivate and inspire people on basic retirement planning and best practices for investing, using evidence-based strategies. I'm happy to comment on your questions. However, please read the Terms of Use, Privacy Policy and the Comments Policy.

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36 Responses

  1. larry macdonald says:

    Andrew

    How about never buy a closet index fund at a MER of 2.4%? Buy an ETF at 0.2% a year instead.

  2. @larry macdonald

    Cheers Larry,

    I did see that your latest post spoke of these. For my readers who might not know what a "closet index fund" is, here an explanation in a nutshell:

    The surest way to maximize returns in the stock market is to own every business (stock) within that market. Sure, some will go bankrupt, but some others will go on to gain thousands of percentage points, but most people will never expect them to. Larry mentioned an ETF, which can be a fund that owns every stock at the lowest possible cost.

    He recommends those. And he's a smart man (I highly recommend his blog).

    His advice also pertains to NEVER buying a "closet" index. These are marketted as actively managed funds, meaning that there's supposed to be a team of people (or a single "genius") buying and selling stocks within the fund. But a closet index owns the same stocks that an index does and charges (in Larry's example above) 12X what an index fund would charge. The individual investor isn't handed a bill for that charge. It's hidden. He/she pays for it with their poor overall performance. As such, with a 2.4% expense, they are destined to underperform the "average" return of every stock in the stock market, by 2.4%. Larry's NEVER is an exceptional one. He's bang on!

    How will you know if your mutual fund is a closet index fund? I have an easy way around this question. Don't even buy actively managed mutual funds. Buy low cost index funds (oe ETFs) instead.

  3. Jean says:

    Here are two more, Andrew and readers:

    1. NEVER seek advice from your local bank's investment "specialist". S/he is a salesperson for the products that will benefit him/her and their employer, not you. Find a good fee-only investment advisor, when you do need advice. (I made that mistake once in my 20s.)

    2. NEVER put your money into a variable annuity, especially if you're young, and no matter if it's "tax sheltered" – way too expensive. It's not the best value for your money, and you're tied to the funds available in that product. (Because of the mistake in #1, the woman sold me such a product. The very $17,000 I put into it at the time, some 15 years later, is now just under the principal amount. It was higher before the recession, but in Jan. 2009 it had dropped to $8360. I have to wait until I'm 59.5 to withdraw it without penalties. Fortunately, I learned the lesson early enough to discontinue contributions.)

  4. Jean,

    Those are two fabulous pieces of advice that I missed—especially the one about variable annuities. The more you learn about variable annuities, the more you can lose faith in the integrity of people. My Singaporean expatriate friends wrapped up in the company, Zurich, are facing the same kind of thing. Very upsetting.

  5. Mike says:

    Andrew,

    Glad to see you post this. I find that a lot of people who don't read up on personal finance and investing aren't even aware of what a sales load is. And then there are back end sales fee (eg. B – Shares) I refer to them a T Shares (trapped-once in, you are going to be paying a hefty fee when redeemed)

    Last year one of my friends had me review her account (that she had parked at one of the large wirehouses) and she was in A and B shares. I asked her if she knew what B shares were and unfortunately she didn't.

    I hope you have a great weekend! Mike

  6. @Mike

    Thanks Mike,

    Do you know of any online video tutoring sessions for people on this kind of thing? I was thinking of putting something together, but I wanted to see what else was out there. I could see some fine tutorials that were text-based, and I could see some videos that were ironically text-based as well. But I couldn't see anyone's "hand and whiteboard" method which I think might be effective for people. What do you think?

  7. Jean says:

    Andrew, have you ever searched Vanguard's Official Channel on Youtube? You might try searching there, http://www.youtube.com/user/Vanguard?cbdForceDoma

    I found their web casts to be very good when I used to listen to them – not all with whiteboards, though.

  8. @Jean

    Thanks Jean,

    I just had a look, and Vanguard's explanation looks to be quite clear. I suppose, given the time constraint they had with the video, they couldn't get into how today's "winning funds" often tend to be tomorrow's underperforming funds. They almost made it sound as if you could work really hard, research like mad, and find active funds that could likely beat the market indexes. But that's (unintentionally, I'm sure) misleading. Thanks for that link!

  9. DIY Investor says:

    Never put money you will need within the next 5 years into the stock market. Don't put more than 5% of investable assets into a single company. Never base your investment buy decision on the basis of a high yield.

    Really good and useful post. I think you would do a great whiteboard video.

  10. The Dividend Ninja says:

    NEVER buy mutual funds (period). Go wtih low cost and low MER Index Funds and ETF's.

    NEVER assume that if you pay commissions for buying mutual funds, even if the sales charges are deferred, you will come out ahead witha buy and hold strategy. You won't!

    NEVER be in a hurry to buy a stock. Wait patiently and get it a lower price.

    NEVER trade too frequently. Buy and hold investors generally outperfrom traders.

    NEVER buy a stock with a dividend yield under 3% or over 7%. There is somethign to be said with risk versus reward. Too low of a dividend yield does not gaurantee stock growth, and too high of a yield means there are troubles with the company.

  11. Mike says:

    @Andrew Hallam

    There isn't enough out there. The industry discloses fees through prospectus which are legal documents that no one actually reads. I think it's a great idea. For a tutorial, you could use a screen capture software like Camtasia and show people the difference between no load vs. A and B shares….But yea, I really think it's a very good idea!

  12. @DIY Investor

    Thanks for adding some great advice Robert. You're definitely right. Nobody should put money in the stock markets that they are going to need within the next five years.

    And your rule about never putting more than 5% of your money in a single stock is excellent.

    Not getting sucked into buying a stock with a really high dividend yield is also great advice. A ridiculously high dividend yield is often a risky venture–a stock that has likely fallen significantly due to financial woes. The stock is likely to fall further, in this case, and the dividend is likely to be cut. Great advice. Kodak comes to my mind when the digital cameras starting coming on the market.

  13. @DIY Investor

    I just had a look at Kodak for the first time in 11 years. I remember being tempted by a high dividend yield 11 years ago for this business. But I didn't buy shares. That's a good thing. They traded at $60 per share when I was looking, in 2000, and today they're about $2.90 per share. The dividend yield was very high, if I recall correctly. I'm sure glad I missed that time bomb! http://finance.yahoo.com/echarts?s=EK+Interactive

  14. @The Dividend Ninja

    Stellar advice Ninja!

    I didn't want to put, "Never buy an actively managed mutual fund" because it might not be the kiss of death the other factors are. But you are right. The odds of buying portfolios of actively managed mutual funds and keeping pace with broad based index funds are extremely slim. I certainly wouldn't recommend actively managed mutual funds—nor would I buy any myself.

    Your advice about not trading your portfolio is also superb, as is your guideline about an acceptable dividend yield range.

    Thanks for adding such great ideas to the list Ninja!

  15. @Mike

    Thanks Mike,

    I don't know much about screen software, but I'll follow up on your suggestion and check out Camtasia.

  16. Mike says:

    Andrew,

    Here you go. An easy and free program is Jing – easy to learn.
    http://www.techsmith.com/jing/

    Take Care, Mike

  17. @Mike

    Great stuff Mike. You're a gentleman! Thank you!

  18. Great post Andrew!

    How about:

    1) NEVER buy anything you can't explain to a 10-year-old.

    Enough said I think.

    2) NEVER buy an IPO.

    You'll always end up paying more and who wants to pay more for stocks?

  19. @My Own Advisor

    Thanks Mark! You're right!

    For readers who don't know what an IPO is, here's the skinny:

    It stands for "initial public offering" and it's a stock that's making its debut on the stock market. Generally, it's associated with a lot of hype. But most IPOs are overpriced and they often represent untested businesses. There are loads of stories about people making thousands of percent off one IPO or another. But investing in IPOs is a bit like investing in lottery tickets. Despite what your brother in law might tell you, nobody knows which one will hit the moon. And buying shares in them is a lot more costly than buying a lottery ticket. Even if you bought every IPO that came on the market, your underperformers, statistically, would drag down your results, and you'd lose to a broad market index. That's the historical reality. And that's why Mark says, "Never buy an IPO"

  20. Steve in Oakville says:

    Hi Andrew,

    Nice post!

    How about a "never" that deals with stock market fluctuations:

    "Never read the finanicial/investment sections of newspapers (or CNBC/BNN) looking for 'expert' guidance"…

    I was going through some of my TD Waterhouse account statements from 2005 the other day. I had a small RRSP of $15000 and some months I had over $200 in trading commissions…what a disaster…

  21. 101 Centavos says:

    How about, never take a stock tip from your shoeshine boy or hairdresser…

  22. @101 Centavos

    Those are wise words Centavos!!

  23. Here's one, never fall for these newsletters promising you 1000% returns on penny stock picks!

  24. @BeatingTheIndex

    Hey Mich,

    You're absolutely right! My investment club fell for a newsletter called The Guilder Technology Report once and we got crushed by its recommendations. At first, we rocked, but then the floor fell out. I think that if people are going to buy stocks, they should do their own research. Don' let a newsletter tell you who you should marry…same kind of thing!

  25. Robber Baron (in Kor says:

    The thing about that ""Z" company (name of a Swiss city) is that have been few other options are available for expatriates, there were/are lots of sales reps in various competing expatriate retirement advice firms (which gives the appearance of more options, though most are selling the same products), and the expats are trying to make good decisions (life savings) based on those limited options. I'm in "Z" myself. And once you are "all in" (several years of contributions, and even more so once fully vested) you really don't want to pay the fees to exit.

    But, now,

    (1) online trading is an option, though it may require a visit to your home country to actually register (I use Sharebuilder) which can be used to compliment or replace contributions in these annuities (but you still get stuck with admin fees based on holdings, so you could be moving backwards in a flat market!)

    (2) more countries where expats work have respectable local markets for investing (off-shore investing is frowned upon by many home countries as well as the lands where the expats are working!)

    (3) DRIP accounts are an option for those who just occasionally want to put money in, and not actively manage the account. Not sure of the issues with selling DRIPS, and again, you may need to be physically present in the land where the DRIP is based to open and sell.

  26. @Robber Baron (in Korea)

    Hey Robber Baron,

    Thanks for the comment! And please get back to me if you have time. I have some questions for you, and if you can answer them, it might help quite a few Korean Expats looking for investing alternatives.

    First of all, are you an American or a non American? In Korea, you should have access to Citibank, correct? They will have (in all likelihood) a discount brokerage arm, as they do in Singapore. With such an option, you can buy exchange traded index funds that trade on the New York Stock Exchange. With that access, you can build a diversified portfolio based on the following:

    1. An ETF based on your home country index (whatever that may be)

    2. An ETF for the world index (VT)

    3. A bond market ETF

    In just about any world city, you can find a discount brokerage allowing you access to the NYSE. Give your nearest Korean Citibank a call to see if you can "trade U.S. stocks". If you can, then you'll have access to all the exchange traded index funds you'll need.

    After giving them a ring, would you mind getting back to me? If they offer the option to trade U.S. stocks, it will help a lot of expats over there because it will give a far cheaper and more effective investment alternative….compared to using that company starting with the letter Z

    Thank you!

    Andrew

  27. @Steve in Oakville

    Sorry to hear about those commission Steve. Ouch! One other thing that's funny is reading those old market prediction/analysis reports we get from brokers….years after they've been written. Whether it's magazine articles or brokerage blurbs, we learn that nobody's a soothsayer.

  28. Daniel says:

    Never buy ANY CHinese stocks. China has a rich tradition of cooking the books to appease investors. During the Chairman Mao great famine. . municipalities would report huge grain harvests and production increases to the Communist party while the peasants starved. . in return those managers got increased bonuses and funding for their communist production facilities from the central government. Well things haven't changed much at all. Look at Sino Forest as an example. There is little accountability and a culture steeped in pleasing their masters, always saying "yes" and saving face. . even if it requires manufacturing numbers. I foolishly invested what I thought was going to be the next greatest thing in CHina. . Youku (think YouTube for Chinese), because their regular TV programming is so dreadful. . I thought Youku would be a surefire win. It has gone down over 60% since I bought their stock!

  29. Hey Daniel,

    Thanks for the detailed story.

    Culturally, much of what you say is correct. Although China is rapidly growing, even their GDP numbers have come into question from time to time. There are cultural reasons for that, and your story nails it. Caveat Emptor.

  30. Joram Hutchins says:

    Hi Andrew

    Any advice on what to do if you have done something you shouldn't do, in ignorance?

    I'm an international school teacher who bought into a zurich fund in 2009 and still paying monthly installments. After reading your blog and talking to friends I now wish I had simply started buying my own index funds. Should I cash out what I can of the Zurich fund and head for index funds or leave whats in the zurich fund and stop the monthly installments?

    • Hey Joram,

      I'm finding that your dilemma is more and more common within the international community. The only good news is that your account was started in 2009, so it should be worth significantly more than it was when you started, thanks to the depressed market levels you bought in at.

      What kind of penalty would you take for withdrawing the money? I guess this should be your first step. It's going to be huge, but I think you'll have to figure out whether it's going to be worth it.

      Next, realize that you'll be paying about 3.5% in annual fees with Zurich forever (unless you get out). This, and the length of the contract you have signed, will likely help to determine what the best course of action will be.

      For example, let's assume that you have $100,000 in Zurich, and that an early withdrawal will leave you with just $60,000.

      Assume the contract is for 20 more years.

      Compound $60,000 at 9% for 20 years and compound $100,000 out at 5.5% per year. We don't know what the markets are really going to make over the next 20 years, but we do know, roughly, what your fees would be if you stayed with Zurich.

      The big question is this: will you make up the difference over twenty years?

      $60,000 compounding at 9% per year for 20 years = $336,204

      $100,000 compounding at 5.5% per year for 20 years = $291,745

      Based on these numbers, the answer is pretty clear. What's more is the fact that if you remain with Zurich, you'll be continuing to add fresh money, which will continue to be saddled with further fees.

      Can you do me a favor? Regardless of what happens, let's do this math together and online, right here on my blog. Then, we should write a post about it. Would you mind doing that? We could reach so many people if we work together on this, warning others away from this kind of investment arrangement. Thoughts on that? Please consider it. We can help plenty of people together if we detail this on the blog with a specific post.

      Thank you,

      Andrew

  31. RobberBaron says:

    There can be other (more positive) issues with a Zurich account (which I also have). One is ease in funds transfers. I use a local (Korea-based) credit card to send funds to Zurich each month. A recurring charge I can adjust with one FAX or email attachment (sinple one-page form). No annual fee on that credit (which I use for ordinary life purposes), and preferred inter-bank rates to send Korean Won to my USDollar-denominated account. The fee is 1%. Contrast that to the FX rates and bankwire charges many of us face. (It seems you can avoid some of this in S'pore with local service providers. Once in my Zurich account, I can buy and sell their various funds freely: no fees, no restrictions, lots of mirror funds, execution usually the next day (a slightly more complicated form to fax or attach to email).

    Zurich may not be the best choice in some locales, but it's a reasonable choice in many others. As an American, I was able to open a Sharebuilder account to trade a good number of stocks and ETFs and even transfer an old employer pension into their IRA program with no tax ramifications, but opening the account from abroad was a real pain. Non-Americans have fewer options.

    • Hey Robber Baron,

      It sounds like you have learned to use Zurich…rather than passively letting Zurich's sales team use you. Nice work. It's true that with many companies, if we know what to ask, what to demand and what we can change, options can open. It's the trusting investor, unfortunately, who becomes the long term sucker. And that's sad.

  32. RobberBaron says:

    While I did reply to Andrew offlist back in February 2011 for the comment far above, the answers never made it to this forum. Citibank Korea offers the same types of local funds as other Korean banks. While there are US-focussed funds, they are the local market product. Which is to say — horrid with high fees to enter and exit and quarterly. Most local banks, plus HSBC and other foreign baks, offer similar, as do most life insurance products. As a permanent resident alien I can buy these, but why would I?

    I believe a similar situation exists in many countries.

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