Yahoo Finance TikTok’s Humphrey Yang Claims These 5 Investments Will Keep You Poor
Everyone should be investing a good portion of their income. It’s one of the key ways to build wealth (if you need an example, just look at multibillionaire Warren Buffett, who built much of his net worth by investing). But investing shouldn’t be done on a whim; indeed, both new and seasoned investors need to be scrupulous and navigate inherent risks with vigilance.
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But how can we tell the difference between a savvy investment and a bad one? On his YouTube channel, personal finance expert Humphrey Yang broke down five bad investments that, instead of leading to fortune, will actually keep you poor. Yang noted that these investments are particularly negative for long-term investors.
Leaving Excess Money in a Savings Account
The most obvious “investment” that will keep you poor is, in a way, not investing at all by leaving excess money in a savings account — especially if it’s with a big bank, according to Yang.
“Keeping your cash at a really big bank is only paying you about 0.05% APY,” Yang said. “On $10,000, that’s only $5 [in interest] per year.”
Yang thinks it’s okay to keep some money on the sidelines and not invest it. “However, if you’re having your excess cash in not a high-yield savings account … I think you’re losing out on a ton of value,” he said.
If working with funds of, say, under $10,000, you should also look into Series I savings bonds. These are backed by the U.S. government and generally pay higher interest rates than high-yield savings accounts, but they do contain some fine print, so Yang advises to do a bit of research here.
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Leveraged Funds
Less obvious a poor investment, in Yang’s opinion, are leveraged funds.
“This is a type of investment that amplifies the return of whatever you’re investing into,” Yang said. “In the most common scenario, a leveraged fund will track an underlying index, and they will use financial derivatives like options to try to amplify those returns.”
Yang noted that this sounds pretty complicated, but it’s simpler than it sounds.
“It basically means this: So if an index you’re tracking is up 1%, you should typically be up 1% … however, if you invest in that index with a leveraged fund, say a triple-leveraged fund, if the index is up 1%, that means the fund will be up 3%,” he said. “That sounds good and all, but let’s say the index is down 1%, it actually amplifies your losses too … You would actually be down 3%.”
Yang added that leveraged funds are highly volatile and are typically used only for short-term trading. According to Yang, long-term investors and investors who are not super sophisticated should avoid them because of two things: their expense ratio, or steep annual fees, and volatility decay, which occurs when an investment goes wildly up and down.
“When any investment goes down a certain percentage, it actually takes a much larger percentage going back up to break even,” Yang said.
Whole Life Insurance
Another investment that will keep you poor, according to Yang, is whole life insurance. Though not technically an investment, as Yang pointed out, it’s typically advertised as one. Don’t be fooled.
To best understand what whole life insurance is, it’s helpful to understand what term life insurance is.
“In term life insurance, you pay a set amount every single month for a death benefit,” Yang said. “For example, for someone who’s 30 years old, they’ll pay roughly $20 a month for 20 years and they’ll have a $500K coverage policy.”
Whole life insurance entails a much costlier monthly premium.
“That fee is often in the hundreds of dollars per month,” Yang said. “The average cost of premiums for a whole life insurance policy is usually 20X higher than that of term life insurance. So for the average 30-year-old, that’s going to be $420 a month.”
In essence, the fees are “really frontloaded, and that’s actually causing a ton of opportunity loss,” Yang said. “You could just buy term life insurance instead and invest the difference of $400 a month.”
Loaded Mutual Funds
A lesser-known investment that can keep you poor is a loaded mutual fund, and it really applies only to those of you who have a financial advisor.
“This goes on in the financial advisory world quite a bit,” Yang said. “Mutual fund companies can have several types of shares, but the most common are A, B and C shares. The difference in these shares is usually how the fees are collected.
“So with A shares, a lot of the fees are upfront and the mutual fund company will try to justify it, saying, ‘Hey, your expense ratios are going to be lower in the long run, especially if you hold this fund for over 40 years. Now, frontloaded fees can actually be up to 5% or higher.”
In Yang’s opinion, this causes a conflict of interest. “You’re going to have to do the math for yourself on if these funds are good for your time horizon, but A shares are typically not a great deal,” he said.
Yang added that he personally likes to stay away from mutual funds due to their high expense ratios and he usually opts for a passive index fund.
Commodities Like Gold and Silver
Yang emphasized that this one really applies to long-term investors: commodities like gold and silver.
“This is a hot take … I know that people love commodities … but gold in the very long term is actually not a really productive asset according to Warren Buffett,” Yang said. “His biggest issue is the fact that gold is just so worthless.”
In other words, Buffett and Yang deem gold a nonproductive asset as opposed to a productive asset.
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This article originally appeared on GOBankingRates.com: TikTok’s Humphrey Yang Claims These 5 Investments Will Keep You Poor
