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In the 1993 film “Jurassic Park,” Jeff Goldblum’s character argues with the scientists who have assured him that their cloned dinosaurs cannot reproduce. “Life finds a way,” Goldblum says.
Extinct for millions of years, dinosaurs survive on the big screen. They frighten and thrill us out of our cash and generate big box-office bucks. (Their latest romp, “Jurassic World,” has grossed more than $600 million this summer.)
Dinosaurs exist in the real world, too — financial dinosaurs that stomp on your goals and chew up your money.
Don’t feel bad: These prehistoric remnants often thrive in the portfolios or financial activities of even the most astute investors. For massive creatures, they are mysteriously stealth-like when it comes to devouring cash from wallets. Life, you could say, finds a way.
Can you detect the beasts that smash portfolio performance and endanger overall financial progress? Consider these five fossils that require burial deep within the archives of financial services history.
1. Load mutual funds
These ancient beasts roaming the asset classes of your portfolio have long since reached their life expectancy. With more than 16,000 no-load managed or index funds available, paying sales loads on mutual funds is akin to taking a big bite out of your investment returns before they have a chance to run.
Whether it’s the A-share price of admission of 3%-5.75% upfront or the creative B- and C-share classes, where load charges are supposedly deferred (but not really), the total expenses of these investments are a challenge to justify. Stay away from this Jurassic world. It will lead only to financial chaos. If you own loaded funds, monitor them regularly with a watchful eye for exit. Move into more affordable options as soon as their performance lags their benchmarks for two quarters.
2. Variable annuities
This blend of mutual funds and insurance busted out of containment long ago and has wreaked financial havoc on thousands of investors. As with the Indominus rex of “Jurassic World” — the product of combining the DNA of multiple creatures into a terrifying monster that would sell more theme park tickets — the financial services industry created these hybrids to benefit itself through lofty commissions and high fees.
If you own a variable annuity, you’d get better acquainted with what makes this creature tick. Don’t be surprised to learn that annual expenses can be 4% or higher. That means every year a significant portion of your return gets devoured by the ravenous VariableAnnuitus rex. Pay attention to surrender or “exit” penalties that can range from 1%-10% and decrease over a period of years. These charges are designed to hold you captive in the cage with these costly beasts for as long as possible.
Work with a financial or insurance professional to devise a strategy to transfer variable annuity proceeds to less expensive alternatives. To defer taxes, an advisor, if properly licensed, can initiate a process called a 1035 exchange.
Take heart: Not all annuities are prehistoric relics. Deferred-income or single-premium income annuities are becoming more popular as ways to supplement Social Security and generate an income you cannot outlive.
3. Payday and title loans
These types of loans for quick cash are growing in popularity. Like the velociraptors of “Jurassic World,” they don’t seem too dangerous until the sharp teeth of interest charges and other fees dig deep into your wallet. With interest rates that can easily top 300% APR, rarely are they a smart choice. Several states have passed legislation to help consumers understand how these loans work. Fast-cash lenders cater to people in a liquidity crunch, usually lower-income groups with poor credit opportunities.
The Consumer Financial Protection Bureau is gaining a better understanding of the nature and magnitude of payday, title and other installment-type loans. It’s customary for a borrower to “roll over” these loans and continue to pay fees and interest charges, thus creating a debt trap that’s tough to escape. If you must use these loans out of necessity, realize that the federal government is actively forming a framework to harness these financial beasts and determine how people can seek credit relief in an affordable manner.
4. Emotion-based investing
Our brains are primal. They’re built to keep us alive, not necessarily to maximize our investment returns.
Dalbar recently released its latest “Quantitative Analysis of Investor Behavior” study. This 21-year analysis consistently shows how poorly mutual fund investors have performed compared with market benchmarks. For example, in 2014, the average equity mutual fund investor underperformed the S&P 500 by more than 8.19%. In fact, the return from the broader market was more than double that of the average equity mutual fund investor: 13.69% vs. 5.50%.
One of the more prominent investor pitfalls is called “anchoring.” An anchor can sit heavy on net worth — like a brontosaurus on the chest. Investors who anchor are focused solely on the price they paid for an investment. If the investment turns out to be a loser, anchoring prevents the investor from selling regardless of whether conditions warrant a sale. They strive to “get even.” Anchoring results in opportunity costs or even bigger losses as additional money is put into underperforming investments. To battle this primal enemy, create a buy and sell rule for every investment or work with a professional to guide you.
5. Brick-and-mortar banks
For higher yields, exit the Jurassic period. Virtual banks can link easily to brick-and-mortar options and are FDIC-insured. Even if not for day-to-day banking, online choices are perfect for savings, especially emergency reserves that ideally should hold six to nine months’ worth of household living expenses. NerdWallet offers a comprehensive hub with savings account basics, tips to find higher savings accounts rates and a list of the best online savings accounts.
There’s no place in household balance sheets for colossal animals, especially those that have a ravenous appetite for cash. Keep the dinosaurs limited to movie choices, and financial success will be more reality than fantasy.
This post first appeared on Nasdaq.
Image via iStock.
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