There are seemingly as many financial products available these days as there are investors. But not all of these are created equal. Ric Edelman of Edelman Financial has compiled a list of 15 financial products a wise investor will avoid at all costs. We dove a little deeper on three of his least favorites.
Hedge Funds
Hedge funds have long been seen as a playground for the rich. But Edelman notes that the hedge fund managers who are selling the product tend to make out a lot better than those they’re selling it to. “They charge a 2% annual fee and they take 20% of the profits. How can you possibly make any money with a fee schedule on that basis?” he asks.
Edelman points out that CalPERS, the nation’s largest pension fund had enough of the fees and the risk, and recently announced it would pull out of all the hedge funds it was invested in.
“Hedge funds are ridiculously aggressive, speculative and risky," says Edelman. "They underperform and one of the reasons they have underperformed is because of their ridiculously high fees.”
Retail mutual funds
These funds suffer from the same underperformance issues as hedge funds. Sure, the fee structure is a bit more palatable (though still there), but as Edelman argues, the risk is quite high.
“The whole schtick of an actively-managed fund is that you’re going to be able to beat the market,” he says. “The vast majority of actively-managed funds fails to beat the market. One of the reasons they fail is because they’re charging so much more in fees than passively-managed funds and they’re often taking much higher risks.”
As Yahoo Finance’s Jeff Macke points out, many investors have chosen to launch their investment strategy by hitch their wagons to a mutual fund run by or aimed at mimicking a successful investor.
“When you invest with a star you are at the whim of the star’s attitude that morning.” Look at Bill Gross who Edelman says has been wrong several times in the past few years, also just up and left PIMCO and the outflows from the fund he ran followed him out the door. “That’s not investing; it’s speculating,” Edelman says. “It’s picking the horse in the horse race. I would rather pick every horse in the race and own the track besides.”
Variable life insurance
It should come as no surprise by now that Edelman is not a fan of variable life insurance for, like hedge funds, it benefits the salespeople, not the buyers. “Variable universal life basically is nothing more than an extraordinarily high-commission product that offers you the promise of not losing money over 20 years,” he notes. “But guess what? During that 20 year period, you may not have any liquidity to your assets; You might have massive surrender charges; the portfolio is going to grow at a fraction of the rate of the regular stock market, all of it designed to enrich the insurance agent and the company that is offering the product.”
Here’s a list of all 15 products Edelman cautions against:
1. Variable life insurance policies
2. Non-traded real estate investment trusts
3. Hedge funds
4. Commodities trading
5. Options and futures trading
6. Derivatives
7. PIPES (Private Investments in Public Equity)
8. Alternative investments
9. Viatical settlements (buying insurance on someone else's life and waiting for that person to die)
10. Master limited partnerships investing in oil and gas
11. Fixed annuities
12. Equity-indexed annuities
13. Lottery tickets
14. Actively managed funds
15. Retail mutual funds (we prefer exchange-traded funds and institutional-grade mutual funds, both of which are far lower in cost.)
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