These Four Investments Are Unicorns and Require Lots of Luck (Don't Do It!)
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I love investing, but what I love more is investing as safe and reliable as possible, with great returns.
I see many people on social media teaching you how to invest in ways that require a lot of luck or for you to be a unicorn. When considering investing risk, I ask myself, "How easy is it to replicate this?"
So, here are four things to *not* invest in, though you may be tempted.
1. Individual Stocks
I won't go into the numbers as to why this is a bad idea. I've done that previously. Instead, I want to share a few anecdotes.
First, who could've predicted Domino's Pizza would have been the number two stock in the 2010s? The 2010s was the decade of Silicon Valley and social media, not pizza.
Second, people who make a living out of predicting stocks can artificially drive up the price of stocks by telling their 100k followers to buy company A.
You only have to understand basic supply and demand to know that'll drive up Company A's stock's price.
But the person telling you which stock to buy has already bought and can thus enjoy the fruits of that rising stock price before getting out quickly. But, because the rise was artificial, the stock will come down.
You may get lucky and can sell quickly enough to make money, but if a lot of people are unloading a stock, it might take time for you to sell it, and you might end up selling it at a price way lower than you would like, and possibly lower than you initially bought.
Here's another story to illustrate my point:
I had a private yoga business, and one of my clients used to trade his stocks based on the day being a "positively" or "negatively" charged day, according to his Kabbalah app.
Kabbalah is a mystical sect of Judaism; this guy wasn't Jewish and was having fun in the stock market, and he thought it was hilarious his "strategy" seemed to work.
I don't know if there's anything to some negative or positive charged days, but it seems pretty random to make money based on this.
And that's why investing in individual stocks might be fun but not an easily replicable strategy.
2. Crypto
If you want to have fun, by all means, have fun!
But don't invest (aka gamble) anything more than you're willing to lose.
Look - a lot of people have made money from crypto. But, these people experienced luck and likely got in at a unicorn time.
What I mean by unicorn time is that it's not a typically recurring event. Crypto was created in January 2009, and those early adopters did quite well. Not because crypto is a good investment but because they got in at the right time.
Here are some numbers to back me up:
According to Lending Tree, 38% of Americans who've held some form of cryptocurrency say they've sold it for less than they bought, and another 13% said they broke even.
This means 51% of people who have bought cryptocurrency have, at best, broken even and, at worst, lost money.
Only 28% of people say they've made a profit. (The remaining 21% still own.) So it sounds like if you want to invest in crypto, you've got about a 50/50 shot of making any money.
I don't know about you, but those aren't great odds for my nest egg.
3. Flip Houses
HGTV has made flipping houses look easy and profitable. My husband, who's in the real estate industry, almost broke the TV multiple times whenever he saw Tarek on Flip or Flop wildly underestimate a renovation cost.
What's more, when you buy a house, you'll likely have it inspected, but they do not rip through floors, walls, or ceilings, so you don't know what you'll find.
Sometimes, you're lucky, and sometimes, you'll find significant issues that'll either be costly or legally required to disclose if you don't fix them. Your asking price will tank if that's the route you go.
It also doesn't help that since 2017, profits from flipping houses have decreased, likely from higher interest rates, home prices, labor and material costs.
This drastically reduces your margin, which is usually relatively small unless you can find that unicorn house.
I will keep returning to this unicorn idea because *of course* people have made money flipping houses. My dad flipped a house in 2021. He did fine; he did all the work himself to save money, though I still thought it wasn't a great idea.
But he has a nest egg elsewhere and was bored from the shutdown, so fine, have fun!
For most people, though, it's just too easy to get in over your head, and to really do well, you're too reliant on unicorns and luck to make this a reliable investment.
Most people making money from flipping houses are:
Buying houses in cash
Already in the industry and can be discerning about what they buy or have access to unlisted properties
Are in the industry and have the infrastructure set up (like contractors or interior designers)
Living in the house while they fix it up
There are just too many unknowns and phantom costs that the average buyer is not aware of. You must factor in closing costs, unknown repair issues, short-term capital gains, higher interest rates, materials and labor costs, and more. The margin is too small, and someone else's success is difficult to replicate.
4. Mutual Funds
Mutual funds are similar to index funds, which I highly advocate for.
Index and mutual funds are both baskets of stocks, so when you buy a share, you're buying hundreds of companies' stocks at once.
This reduces the risk of buying stock in only one company.
The critical difference is a computer manages index funds, while a human manages mutual funds.
But, you have to pay a human. This makes the overhead cost of an index fund much cheaper.
So if both index and mutual funds objectives' are to match the market, purchasing the cheapest thing possible makes more sense because higher fees eat into your earnings.
For example, you invest $10,000 into a mutual fund, leave it there for 30 years, and get a 7% rate of return with an expense ratio of 0.99%. (Typical for a mutual fund.) After 30 years, you would have $76,000. However, you're going to pay $18,000 of that in fees.
Or, you could invest in an index fund with the same return rate as a mutual fund, except the expense ratio was 0.04%. (I have some at that rate!) You'll only pay $849 over 30 years.
The human managing mutual funds must beat the market yearly to make mutual funds worth it. Sometimes, they can.
However, I have to come back to luck and unicorns. That was luck, or there might've been some unicorn situation in the broader economy that allowed that mutual fund manager to do so well.
Any human at any point can beat the stock market. (Hell, I have when building my portfolio!) But I cannot reliably beat the stock market *every* year.
And according to historical statistical analysis, other humans, including wealth managers, can't either.
So when it comes to investing, no
Stocks
Crypto
Flipping houses
Mutual funds
So, what do you invest in?
Index funds!
I love index funds because you can easily replicate the success of others. Most people who invest in purely index funds and build a balanced portfolio will see a 7% to 10% average rate of return year over year.
Buying Amazon in the early 2000s was luck. A house for pennies on the dollar after 2008 was a unicorn.
This is not. This is a simple, streamlined strategy based on historical statistical analysis.
Building a portfolio of index funds is one of the most reliable ways to build wealth for yourself and your family.
So, if you want me to teach you how to do this, I would love for you to sign up for my investing class!
I'm excited about my upcoming investment class, Everything You Need to Know About Investing, because it can be pretty straightforward.
The goal with my upcoming class is that you'll have an investment account either set up or optimized by the end of class.
I'll show you how your investment can be hands-off or a bit more hands-on IF that's what you want to do.
Not investing or having someone else manage your investments will cost you tens of thousands, if not more.
Here's what I'll teach you in class:
The pros and cons between taxable and tax-advantaged investment accounts (like Roths, 529s, etc.)
How to choose which investment accounts are right for you based on your goals and life circumstances
How to pick your investments and build a lucrative yet low-risk and low-cost portfolio
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