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A look at some speculative â€œinvestmentâ€ vehicles, along with a brief overview of the upside and downside of each.
When I recently wrote about risk, I mentioned the generally inverse relationship between risk and return, and cautioned that a portfolio without risk will also be generally devoid of potential return. Now, let’s have a little fun with the concept of investment risk. Please note: I am not “recommending” any of these vehicles. But that’s also not to say that they’re all inherently “bad.” Let’s take a look at some speculative “investment” vehicles, along with a brief thought on the upside and downside of each.
Related: 5 Simple Steps to Paying Down Debt
Playing the Lottery
What it is: A pipedream!
Upside: Winning tens of millions of dollars. Losing friends who only like you for your money.
Downside: An almost perfect possibility of losing your entire investment. I cheated a bit here, because playing the lottery isn’t really an investment. It’s a gamble with a house edge so large that not even the greediest casino owner would offer one. The odds of winning one of the big Powerball-type lotteries are somewhere around 1 in 200 million. Whatever you spend on lottery tickets could be better invested in … just about 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 you die, and earning money 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 5-10 times the cost of term policies. They may come with management fees as well. Do your homework before you delve into a cash-value plan. Life insurance is complicated as it is, with lots of contract language in fine print. Read all prospectus language carefully, and 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 Other Collectibles
What it is: A fun hobby, with the potential for turning into a fortune or a 3-minute segment on television reality show “Pawn Stars!”
Upside: Collectibles sometimes increase in value, and searching for that long-lost, mint-condition Babe Ruth rookie card 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, or the really old coin don’t appreciate much in value or have much of a market. Collect away, by all means, but do it for the entertainment, not for the investment.
Interest-Earning Savings Accounts
What it is: Wait, what’s this doing here? An interest-earning savings account isn’t risky!
Upside: Simple, safe, backed by the government.
Downside: Savings accounts are fine, even admirable, as a savings tool. 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.
A Final Word
Many of the vehicles covered here fall under a similar category; they are more “pursuits” than genuine investment strategies. Treated as such, it may be fun to drop a dollar or 2 here and there on a lottery ticket or to buy a coin collection. Just don’t treat those items 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 securing your future.