Even if an investment appears to guarantee impressive returns, you must understand how you would get out if you needed your money. “Planning for divorce” is a key step with most significant financial decisions.
There are many valid and potentially lucrative business opportunities that are hard to unwind. You should expect higher returns for this lack of liquidity.
Mutual funds with loads. Many mutual funds include a load that is used to help pay your adviser. You can quickly determine whether you hold some “loaded” funds by examining your statement and looking for an A, B, or C after the name of the fund.
A-shares generally charge a 2 percent to 6 percent commission up front, B-shares have a similar back-end payment depending on how long the investment is held, and C-shares may have a combination of those. While these funds do not forbid you from selling, you are committed to paying a fee in most cases.
Some pension plan investments. Even respectable investment companies can put restrictions on withdrawals. One common example is many University of Colorado employees invest with TIAA-CFEF in their retirement plan. Those with the TIAA Traditional Annuity interest bearing account have the benefit of a guaranteed interest rate.
In return for the steady income, TIAA often requires that withdrawals be taken over 10 years even once you leave the employer or retire. Note these restrictions do not apply to the CREF Stock and other similar funds.
Variable annuities. Variable annuities are almost always larded with heavy exit fees if you change your mind within 10 years or so of your initial investment. The industry has ingeniously characterized these exit fees as “surrender charges,” as if by deciding to look elsewhere for an investment you are the financial equivalent of Corwallis at Yorktown.
These charges can total up to 12 percent of your initial investment. Be mindful that many investors have tarried in inadvisable investments simply due to these surrender fees. It may make sense for you to pay your penalty and put it behind you.
Cash value life insurance. This is life insurance that has an investment component. It may be called variable life, universal life, or variable universal life. Just like their variable annuity cousins, these policies often have surrender charges if you cash out your policy within a decade of your initial premium payment. In fact, the surrender percentages can run well into the double digits plus a load is deducted with each additional premium.
Private real estate investment trusts and limited partnerships. Too often clients come in with a private REIT in their brokerage account that is generating little income. A hefty commission was paid to the adviser — perhaps 8 percent or 10 percent.
Unlike a stock or mutual fund, you can’t easily resell limited partnerships. You need to go back to the investment company to see if there is a market for your shares or if the company is willing to buy back your investment.
High net worth investments. Relatively high net worth investors, those with a net worth of $1 million or who earn more than $200,000, are considered accredited investors and gain entry into a new category of investments. While it pays off in the long run, money placed with hedge funds, in venture capital, and oil and gas drilling deals are generally cumbersome to redeem.
Finally, timeshares usually go down in value the minute you purchase them. Just look on timeshare resale websites to see that in many cases they can’t be given away. Understand the exit strategy for your financial moves, so you can determine how permanent your decision really is.
Dave Gardner, for the Daily Camera.