Investments to Avoid
- Alan Lavine
Sometimes making money means not losing it. Here are few tips on to avoid losing money in the financial markets.
· nbsp; Avoid chasing after high yields. High yield or junk bonds pay rates over more than 11 percent. But Moody's, a bond rating agency, estimates 10 percent of high yield bond issuers will go belly-up this year.
· nbsp; Avoid investing in long-term bonds. Interest rates are expected to rise as the economy picks up steam. Bond prices and interest rates move in opposite directions. So if rates rise, bond price fall. The longer the maturity of the bond, the greater the price drop. If rates rose 1 percent, a 20-year Treasury bond would decline about -12 percent.
· nbsp; Skip high-yielding tax-free municipal bond funds that use leverage, or borrow money to invest. If the manager bets right, you can make a big profit. If he or she is wrong, you can lose your shirt. Standard & Poor's reports that many states are running budget deficits this year. They have to tap the reserves. This is not a good sign for municipal bonds.
· nbsp; Avoid investing in variable universal life insurance. With variable universal life, you can vary your insurance premium payments and invest in stock mutual funds. Long term, the cash value is expected to grow more than whole life insurance, which pays fixed rates on your cash value. Sounds good. But many variable universal life policyholders have had a rude awakening. Their stock funds have done so poorly over the past few years that the insurance company has asked them to pay higher premiums. The reason: There is not enough in the cash value account of the policy to cover the cost of the insurance.
· nbsp; The best bet is to stick with whole life insurance. The insurance company pays you interest on your cash value. It also pays you dividends, or excess insurance company profits, at the end of the year. There is no guesswork with whole life insurance. You pay the same premium each year. There are no surprises.
· nbsp; Avoid chasing after hot funds. Many people bought technology and growth stock funds that were up 80 to 150 percent in 1999. Those funds lost 70 percent of their value over the past two years.
Alan Lavine and Gail Liberman are husband and wife columnist and authors of The Complete Idiot's Guide To Making Money With Mutual Funds, (Alpha Books).
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