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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
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.