5 Types of Companies You Should Never Invest In

A lot of good investments seem perfect, right in your back yard. However, many of these attractive investment areas are not a good bet. I’ve learned that the hard way. Here are some areas you probably already invest in, but that’s not where your money should be.

Monopolies

A company with a monopoly in one industry seems like a great investment, but it isn’t. Someday that monopoly will be broken, either by a government or some competition, and the house of cards will tumble. Consider the large video rental chains that monopolized certain regions of the country in the 90s, and today are struggling to stay alive. Their monopoly was broken by new technology. No monopoly lasts forever.

The Company You Work For

Don’t put all your eggs in one basket. If you work for XYZ Co. and it runs into financial difficulty, you might be laid off work. Imagine that happening, and half your portfolio is invested in XYZ Co. Now you’re laid off and your nest egg has shrunk. In Wall Street technical terms: it’s a double whammy. Of course many of us will get stock options and bonus shares in the company employing us, but we shouldn’t shovel a lot of extra investment cash into the same oven. If XYZ does well, so will your job; that’s enough. Likewise, if one company supports your small town, then be careful there too. Some large companies employ up to half a town’s residents. If that company crumbles, so will your town. Invest elsewhere for security.

Unregulated Companies

Foreign stocks are all the rage now, with many outpacing domestic US stocks by 20%. However, make sure you’re investing in foreign company ADR’s (American Depository Receipts) that are listed on a regulated US exchange. For example, do not buy stocks directly from the Brazil stock exchange, as it might not offer any protection to foreign investors. If you want to dip into that market, buy a US regulated Brazilian Fund.

REITS

Real Estate Investment Trusts are usually a bad investment. Unless you’re a real estate wizard, you should stay clear of REIT instruments. Real estate in general is far too tricky for the casual investor. Buy your own house to live in, but don’t branch out into real estate as an investment – unless you’re a professional.

Penny Stocks

Any company whose stock sells for less than $2 per share should be avoided. These companies rarely ever climb out of the trenches. You often hear of a stock going from $1.50 to $50 per share in 5 years, but do you know why you hear about them? It’s so rare, it’s newsworthy! Most penny stocks just fizzle and struggle year after year. There is no harm in throwing a small gamble on a penny stock, but never put more than 1% of your portfolio in them. Personally, I stay away from penny stocks altogether, and I also don’t play the lottery. I know my luck isn’t that good.

More from this Contributor:

How I Pick Winning Stocks Year after Year

Identify and Avoid Real Estate Rental Scams

How to Better Diversify Your Investments