How to Lose Big Money in 2014

By: Alexander Green, Chief Investment Strategist, The Oxford Club

Last week Forbes came out with its 2014 Investment Guide. The cover promises “365 Ways to Get Rich.”

I plowed through all of them. Some ideas were excellent and insightful. Others were dreadful and even harmful. This week I’ll cover both.

I’ll review some of the worst advice today. In my next column we’ll move on to the best.

  1. Keep an eye on – but don’t obsess over – mutual fund fees and expenses. Wrong. You should be Ebenezer Scrooge himself. Actively managed mutual funds are one of the worst long-term investments you can make. History shows that 95% of them cannot outperform an unmanaged benchmark. Why? Because their fees are outlandish. And so are the tax consequences of buying and holding them. A far better bet is a portfolio of individual stocks or low-cost index funds and ETFs. And obsess over the expenses. After all, it’s your money.
  1. Form family limited partnerships to transfer assets at a tax discount. This can be a bad and very expensive idea. I have a friend who funded a family limited partnership with $1 million and soon found he was paying more than $100,000 in annual maintenance costs. (Yes, more than 10%.) Some family limited partnership structures are better than others. But there are better ways to get assets to family members. Start by taking advantage of the $14,000 annual gift exclusion. (Make sure your spouse gifts too.)
  1. Buy the “gold you can eat” – farmland. Farmland is subject to terrible boom and bust cycles. Where are we now? Real farmland prices have been rising for the last 18 years. Experts in this area claim that we may be in the biggest farmland bubble ever. Want to lose your shirt in 2014? Roll the dice with farmland now.
  1. Don’t invest in a hedge fund unless its audited results are reported in compliance with Global Investment Performance Standards. I can shorten this one. Don’t invest in a hedge fund, period. The vast majority have high minimums, poor liquidity, outlandish expenses (including management fees that include 20% of the profits) and mediocre performance. You want to get rich in 2014? Manage a hedge fund. Don’t invest in one.
  1. Defy conventional wisdom and increase your stock allocation after retirement. This one is nonsensical. How can you tell someone to increase his or her stock allocation when you don’t know what it is? However, if you’re retiring at 65, do factor in that you may spend up to three full decades in retirement… and plan accordingly.
  1. Wait for inflation to rise before buying TIPS. This is about as bad as investment advice gets. Does anyone think these bonds will be cheaper once higher inflation raises its ugly head? Buy inflation-adjusted bonds now (if you don’t already own them) and remember to pat yourself on the back when the consumer price index moves higher. And it will.
  1. Buy into a VIX futures fund that uses wild, seemingly irrational swings as buying opportunities. Don’t buy VIX futures funds or any other kind of futures fund. This is wild speculation, not investing.

I don’t want to create the impression that all of Forbes‘ 2014 investment advice was this bad. Some of it was quite good… and I’ll share it with you in my next column.

Good investing,