Don't Plan Your Retirement with These Investment Vehicles

There’s generally an inverse relationship between risk and return, and a portfolio without risk will usually be devoid of potential return. Investment risk is something that comes with the territory. Not all investment vehicles are inherently “bad,” but some are speculative. Let’s take a look at some “investment” vehicles you might be considering, as well as their upsides and downsides.

Playing the Lottery

What it is: A game of chance.

Upside: Winning tens of millions of dollars. Losing friends who only like you for your money.

Downside: Playing the lottery is an almost perfect possibility of losing your entire investment. I cheated a bit here, because playing the lottery isn’t really an investment at all. It’s a gamble with a house edge so large that not even the greediest casino owner would offer it. The odds of winning one of the big Powerball-type lotteries are somewhere around 1 in 200 million. Whatever you spend on lottery tickets would be better invested in literally anything else.

Cash Value Life Insurance

What it is: With term insurance, you pay a premium, and upon the death of the insured person, you collect money. With cash value insurance, money paid for premiums is placed into an account that is designed to earn income.

Upside: Your payment does twice the work, protecting you in case of the death of a loved one and earning money that you can ultimately withdraw.

Downside: These policies aren’t inherently bad, but they’re complex and they come at a cost—sometimes as high as 5 to 10 times the cost of term policies, and they may come with management fees as well. Life insurance is complicated as it is, with lots of contract language in fine print, so be sure to read all prospectus language carefully. Also, find out what the insurance will cost over the term of the plan, exactly what is covered, and under what circumstances you can take money out.

Art, Antiques, and Collectibles

What it is: A fun hobby, with the potential to turn into a fortune.

Upside: Collectibles sometimes increase in value, and searching for that long-lost, mint-condition collectible can be a fun diversion.

Downside: The few true stories of fortunes made through serendipitous discovery drown out the millions of mundane situations in which the found Rembrandt, the immaculately kept antique car, and the extremely old coin don’t appreciate much in value or have much of a market. Collect away, but do it for your own pleasure, not for the investment.

Interest-Earning Savings Accounts

What it is: Wait, isn’t an interest-earning savings account devoid of risk?

Upside: Simple, safe, and backed by the government.

Downside: Sure, savings accounts are fine as a savings tool—even admirable. But they are terrible as an investment tool. Inflationary risk—the risk that your investment will not keep pace with inflation and will therefore be devalued—makes a savings account a lesser evil than some of the other items on this list, but a potential evil nonetheless.

Many of the vehicles covered here fall under a similar category; they are more “pursuits” than genuine investment strategies. It may be fun to randomly grab a lottery ticket or to buy a coin collection, but treat those objects for what they are—personal entertainment. Don’t treat them as investments, and don’t ignore the potential opportunity cost that comes from putting money into a risky hobby that could be better spent on investing in your future.