THIS POST MAY CONTAIN AFFILIATE LINKS. PLEASE READ MY DISCLOSURE FOR MORE INFO.
I just finished teaching another Reaching FIRE course. During the Investments portion of the class, inevitably I was asked my opinion on various types of alternative investments.
Don’t get me wrong. There are many different ways to make money when it comes to investing. However, for the lexicon of what I consider investments, I usually only consider an asset an investment if the underlying asset can generate cash. Otherwise, I tend to think of these investments as speculative.
Related: The Benefits of the S&P 500
With that said, let me share 4 popular “investments” with you, that in my opinion, really aren’t investments.
1. The Home You Live In
Can I share one of my biggest pet peeves with you?
I can’t stand it when I hear real estate agents say, “Your home is the biggest investment that you’ll ever make.”
A home is not an investment.
As I’ve shown previously, real estate has barely outpaced inflation, returning just 0.2% on average over the years. On top of that, a home, especially if you have a mortgage, is a liability.
My grandma has lived in the same home since 1957. She bought the home for robust $25,000. Now, the house is worth close to a half a million dollars. Real estate agents would say, “Look at that return; it’s increased by 20 fold since she first bought the home. That just goes to show you what a wonderful investment a home is.”
In the words of ESPN’s Lee Corso, “Not So Fast My Friend.”
If my grandma had invested that $25,000 into the S&P 500 in 1957, she would have almost $900,000 today.
That’s a $400,000 difference between the two “investments.”
We all need a place to live, but let’s not be confused and think of our home as a lucrative investment.
Related: Is Your Home Truly an Investment?
2. The Hot Fad of the Moment
Growing up, I loved baseball cards. I bought as many packs of cards as I could, and I couldn’t wait to receive my monthly Beckett guide, which told me how much my cards were worth. I was convinced that I was going to gain a lot of wealth based off the cards that I collected.
Little did I know that the bottom would sharply fall out after that. My “investments” virtually became worthless overnight.
Looking back, I wish I had traded my baseball cards for stock companies instead. I know I would have enjoyed owning Coke, IBM, and Apple a whole lot more than some of the cards I have gathering dust in my basement.
But, it’s not just baseball cards that have lost value after being the hot fad. Look at Beanie Babies, which my Aunt was convinced would be worth millions one day. Even Thomas Kinkade artwork eventually was mass produced and went belly up.
Whenever someone thinks that something will be a collectible, chances are that it probably won’t be for very long.
Related: Are Collectibles A Wise Investment?
3. Gold and Commodities
I hate gold.
I’ve said it before, but gold makes no sense to me. It’s like investing in dollar bills. We give it value because someone tells us it’s worth something. At the end of the day though, you can’t eat gold, and it is much less useful in comparison to other metals.
Personally, I don’t get the hype.
However, there are gold bugs trying to convince us that we need gold and other commodities in our portfolios, in case the market drops. The problem with that train of thought is if the market drops, and zombies overtake us, gold won’t do us any good.
In the same way, buying future oil, pork bellies or Bitcoin is betting on the direction of a future investment. Personally, I’d personally prefer to invest in the people and companies that do this type of work, or those who make cash of these products, rather than the commodities themselves.
Related: Why Gold Is a Bad Investment
4. Education
Let me be the first to say that I am a huge proponent of higher education. I realize that this “investment” can be controversial, as statistics have shown that college graduates on average earn nearly $1 million more than their peers who only have a high school diploma.
With that said, you must have a plan in place when going to school. I can’t tell you the number of people that I know who started college and then dropped out because they wanted to pursue construction, plumbing or even electrical work.
On top of that, I’ve known quite a few people who have also gone back to school to pursue a totally different career path. Some of my friends in their 30s are back in school to obtain engineering degrees, theology degrees, or even accounting degrees. They are paying for an undergraduate education all over again.
Selecting the wrong major can cost you hundreds of thousands of dollars, plus time that you will never get back.
On top of that, all education is not created the same.
Studies have shown that the return on investment for public universities can be nearly twice as much as private universities according to this Lexington Law study.
Furthermore, the major that you choose can greatly alter your finances.
Studies have shown that graduating with an Engineering versus a Communications degree can change your future income earnings by almost 300%.
While I’m not trying to say that a Communications degree is useless, know that there are other degrees that might afford you a bigger bang for your buck.
Related: How to Pay for Your Kid’s College Education
Right there with you on this list. I might add insurance. Insurance is not an inveatment it’s a risk hedge. You can make more money investing then buying insurance, so when your not mitigating a risk use the right tool.
FullTimeFinance recently posted…When Can You Self Insure?
You are absolutely right. Insurance is not an investment, definitely not a fan of those that say that it is.
I have always of thought of education as one of the best investments someone can make. Some people see it more as an expense and drop out of high school only to realize that the return to their middle school education is minimal.
I think a house can be a good investment if it had a nice appreciation rate and if we can househack to make an extra income or something.
Ms. Frugal Asian Finance recently posted…The Financial Implications of Having A Baby While In Grad School
Thanks for sharing Ms. FAF!!! Education is definitely a great investment if you “buy” the right major. I’ve seen too many friends buy the wrong major or drop out which has cost them more in the long run than it should have 🙁
I think that with most investments, it really depends on when you started investing. For example, the area that I lived in, housing price pretty much doubled during the last five years. On the contrary, we can also argue that in other places, the price had not moved at all.
With every investment, you can succeed if you have a strategy and understand the ins and outs of the investment that you plan to invest in.
Leo T. Ly @ isaved5k.com recently posted…Money Lessons learned From My First Job
The home that you live in is not an investment. MustardSeedMoney made it very clear. Any real estate property held as rental or REITs is an investment.
People confuse between ASSETS and INVESTMENTS. Investments produce ADDED monetary worth – the stocks you buy and own bring capital to the company which then uses it to generate added value. Investments and Assets can be go up or down in value. Assets don’t generate any added value.
That’s crazy to think that housing has doubled in five years in Toronto. I am really hoping that Amazon doesn’t come to the DC area, as I think it will really price people out in the future.
Look at it this way. It will be hard for people to get in the market if they haven’t gotten their toes wet yet. Since you’re already in the market, you’ll reap the benefit of a hot market. Unless you’re still looking to upside your house.
Leo T. Ly @ isaved5k.com recently posted…8 Ways To Tell If You Will Be Rich
You’re absolutely right. It’s definitely getting tougher and tougher in the market these days. I do wonder how much longer it can last.
I consider the home I live in to be an investment. I don’t plan on living there forever. So when I do decide to sell it, I hope to make a nice profit from it.
CJ recently posted…Use YouDrugstore to Order Your Medications and Get 10% Off
Thanks for sharing CJ!!! I feel like most people I know are planning to live in their house until they pass away and only a couple are planning to downsize and live off the gains.
On #3 I respectfully disagree. I have a stash of physical bullion (not “paper gold” as in ETF’s) and plan to hold these for the long term. I also have silver, rolls of Morgan silver dollars and I even have 5 one ounce Platinum bullion coins. I like physical metal and it does have worth one is a store of value. My main reasons I have so much bulllion is I believe it’s a suitable INSURANCE POLICY. It insures against ravaging inflation that may read its ugly head over the next few years. It’s also an insurance against Government. I write about my reasons here:
https://firechecklist.net/2018/04/01/alternatives-part-iii-cash-bullion/
You can disagree but it doesn’t change the fact that gold, and other precious metals, is an asset. It’s not an investment.
It’s an asset but more importantly, precious metals are an insurance policy. An important one!
Thanks for sharing Mr. Fire by 2033!!! I always appreciate hearing the other side of the coin. While we may disagree, I always love the feedback 🙂
Great list.
Love or hate Robert Kiyosaki – he opened my eyes to the fact that your “house is not an investment.” I learned that before the house buying frenzy and subsequent collapse. It served me well to buy a modest house with a large downpayment.
I periodically see gold promoted as an “investment.” It produces no interest payment or dividend and has high storage costs. It is impossible to know when it will go up. I agree it isn’t an investment at all.
I had not seen the public school vs private school ROI. That is awesome. My wife and I were public school-educated all the way and I want the same for my kids. This gives me more fodder for my argument.
Thanks for stopping by!!! The numbers are staggering when you see the public vs. private ROI. I had no idea but it just goes to show you that things aren’t always what they appear to be.
Thanks for being gracious. I enjoy your blog.
Our home is a partial rental that generates income but it’s still definitely not an investment. It’s a home first and maybe a mini business but it’s not an investment until we move out and we have tenants that provide cash flow. My husband said people who don’t save should get a house because it forces you to save. If you can save without trouble, invest it in the market.
A house is definitely a forced savings account. It’s been a wonderful asset but hasn’t appreciated nearly as much as I was hoping along the way 🙂
I include “cryptocurrencies” under the hottest fad of the moment kind of investment. All good points. I don’t get the allure of gold as an investment as well. I think a rental property would count as investment, but its a bad idea to put all your eggs in your home and count on it as a source of income in retirement.
Enoch@SavvyNewCanadians recently posted…Simplii Financial Review: Start Earning On Your Chequing Account
Thanks for stopping by Enoch!!! I would definitely agree that Cryptocurrencies fall under the hottest fad. That is one of the most FAQ’d questions I get on a daily basis.